European Union Likely to ‘Bail In’ Large Depositors

Today’s AM fix was USD 1,436.50, EUR 1,103.47 and GBP 938.15 per ounce.  
Yesterday’s AM fix was USD 1,429.75, EUR 1,102.52 and GBP 931.19 per ounce. 

Cross Currency Table – (Bloomberg)

Gold fell $11.90 or -0.82% yesterday to $1,431.40/oz and silver finished -0.8%.

The European Union will today meet to discuss and move forward the proposal to ‘bail-in’ depositors with savings of over €100,000 as part of future bank wind-downs.  It now looks likely that the EU is going to take unprecedented steps to sequester monies from its citizens in the event of future bank failures.

Only three months ago a €10 billion bailout was announced by the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) in return for Cyprus agreeing to close its second largest bank, the Cyprus Popular Bank and in the process levying all uninsured deposits and up to 40% of uninsured deposits in the Bank of Cyprus. All insured deposits of €100,000 or less were not included as part of what we now know to be a ‘bail in.’

As it is the Irish that currently hold the EU presidency, this key legislation is being proposed and presented by Ireland’s finance minister, Michael Noonan. Walking a tightrope, Noonan and his team have to negotiate the significant differences that exist between member states. Some states have not ruled out the possibility that insured deposits would also be included in the ‘bail-in,’ a proposition rendered senseless considering that all deposits under €100,000 are insured.

A key development prior to today’s  EU finance ministers meeting is that uninsured deposits of over €100,000 would be ‘bailed in’ in a bank that is resolved – the successful restructuring of an institution which ensures the continuity of its essential functions, preserves financial stability and restores the viability of all or part of that institution. Where the resolution is unsuccessful and the bank is wound down, then it is proposed that depositors would rank higher than other creditors.

Gold in Euros, Year to Date – (Bloomberg)

Nothing is guaranteed. Only on 4th April, Mario Draghi, President of the ECB, in an ECB press conference, when asked about the Cypriot bail-in as a template for future cases replied, “let me stress that Cyprus is not a template! I have not had chance to talk to the President of the Eurogroup, but I am absolutely sure that he has been misunderstood. After all, the bail-out of the Dutch bank SNS REAAL, which involved the bail-in of only shareholders and junior debtors to the tune of €4 billion, had been agreed only a few days earlier. And that is no template either.”

Gold in U.S. Dollars, Year to Date – (Bloomberg)

One thing appears to be guaranteed. Large savers appear to be deemed fair game when it comes to mitigating for the losses in the event of a bank failure(s.) This will prove to be decisive and while the European Commission meets to discuss and review the new banking legislation; Europeans with deposits of over €100,000 will consider their alternatives.

GoldCore has long advocated that depositors hold a portion of their assets in precious metals. Our investment rationale for holding gold is as a portfolio diversifier, a hedge against inflation, a safe haven asset, and a hedge against currency risk. We can now add deposit confiscation to that list.