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Wednesday
Jun122013

The Dijssel-Bomb

WEDNESDAY, JUNE 12, 2013

 Eric Sprott and David Franklin

This past March, Jeroen Dijsselbloem, the head of the finance ministers of the eurozone, shocked the markets with seemingly off-the-cuff comments suggesting that the Cyprus banking solution will, "serve as a model for dealing with future banking crises."1 Depositors across Europe took a collective gasp of horror – could banks possibly confiscate depositors’ funds in a form of daylight robbery? Indeed they could, and last week the Bank for International Settlements (“BIS”), the Central Bank's Central Bank, published what we have referred to as 'the template'; a blueprint outlining the steps to handle the failure of a major bank and the conditions to be met before ‘bailing-in’ deposits.

In their recently published paper "A Template For Recapitalising Too-Big-To-Fail Banks", authors Paul Melaschenko and Noel Reynolds argue for a “simple” mechanism to recapitalize failed banks without the use of taxpayers' money. They propose a process whereby a bank, if it reached the point of failure, could transfer ownership to a newly created holding company over a weekend and be recapitalized. The bank would then be sold, enabling the market to determine the ultimate losses to previous equity holders and creditors. And, yes, this scenario includes losses for depositors above a guaranteed limit. Presto! A new bank with a clean balance sheet, ready to receive liquidity support from the prevailing central bank, without the need for handouts, bailouts, TARP programs, or any other form of government assistance. Previous debt and equity holders and depositors of this failed bank would be left with an equity position in the new entity. This 'template' would ensure that "shareholders and uninsured private sector creditors (read: depositors and bond holders) of such banks, rather than taxpayers, bear the cost of resolution."2 While at the moment this framework is only outlined in a discussion paper, it confirms our suspicions. While the old template involved “bailing out” banks through the transfer of toxic assets from the corporate sector to the taxpayer, the new template calls for “bailing in”. In this model the risk is contained within the affected institution at the expense of equity holders, bond holders and finally depositors. Far from being an idle comment, the unscripted 'bomb' that Mr. Dijsselbloem dropped on the market during the Cyprus Banking crisis is on its way to becoming a reality across Europe and other major banking centers.

To read this article in full please click here.

With gold, silver and Uranium stocks being out of favor one must decide if this is a problem or an opportunity. We have steadfastly refused to buy gold and silver mining stocks for the last two years and as evidenced by the HUI we feel that our decision to hold back has been vindicated. The damage done to the mining sector may not be over yet but this demise is starting to offer up some exciting opportunities in my view.

Great care will be needed in the selection process in order to generate a reasonable profit and that’s where our new venture begins. ‘Stock Trader’ has begun trading on behalf of ourselves and our much valued subscribers, all exciting stuff which we are really looking forward to, if you wish to join us then please subscribe below;

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Reader Comments (2)

Sell gold?

I think not.

June 13, 2013 | Unregistered Commenterfallingman

Got to keep you on your toes - these are interesting times, everyone wants to call the bottom, but as you know we will only its in, when it has passed - I dont think that we are there yet, but thats just my very humble opinion.

June 13, 2013 | Registered CommenterGold Prices

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