Bail-Ins at “Bad Bank” Unconstitutional Says Austrian Court

– Austrian decision to renege on guarantees made to junior bondholders overturned
– Court does not overrule bail-ins per se
– Bail-in legislation still in place across Europe
– EU deadline to implement bail-in legislation by end of this month
– Depositors – savers and capital of SMEs exposed to bail-ins

An attempt by Austria to bail-in junior bondholders at the Heta “bad bank” has been overturned by the highest court in the country.

Last year Austria passed legislation which annulled guarantees previously given by the state of Carinthia to bondholders of Heta, effectively writing off €890 million.

Heta was set up to manage the assets of failed lender Hypo Alpe-Adria-Bank. Carinthia state had  guaranteed around €10 billion of Heta debt – a figure which dwarfed its own revenue more than four fold, which eventually forced the Federal government to cover the guarantee.

The ruling does not outlaw “bail-ins” per se. It simply ensures that guarantees given to bondholders cannot be retrospectively revoked.

The Austrian government has ploughed €5.5 billion of taxpayers’ money into Heta. When auditors found a €7.6 billion hole in its balance sheet in March the government said it would not pay “one single euro” more to the bad bank which is to be wound down.

A debt moratorium is in place – based on the Bank Recovery and Resolution Directive (BRRD) which makes “bail-ins” the norm across the EU – while the process is worked out. The bondholders who had been burned will now enter that program.

However, court president Gerhardt Holzinger says “he expects to deal with more complaints about…Heta’s debt moratorium,” according to Bloomberg.

Bail-in legislation is still in place across Europe. The European Commission recently threatened to take legal action against those nations who had not yet ratified the BRRD and gave them just two months (until the end of July) to adopt the new EU bail-ins rules. The BRRD purports to protect taxpayers from the need to bail out banks but appears to be again favouring the interests of large banks over those of prudent savers and indeed small and medium size enterprises who could have their savings confiscated.

Under the legislation, government guarantees on bank deposits – usually up to a value of €100,000 – are being quietly disposed of. In their place will be a type of insurance fund paid into by the banks which will be woefully inadequate.

Must read guides on bail-ins:
From Bail-Outs To Bail-Ins: Risks and Ramifications –  Includes 60 Safest Banks In World

Protecting Your Savings In The Coming Bail-In Era

MARKET UPDATE
Today’s AM LBMA Gold Price was USD 1,096.75, EUR 991.01 and GBP 701.65 per ounce.
Yesterday’s AM LBMA Gold Price was USD 1,095.60, EUR 990.06 and GBP 702.13 per ounce.

Gold/Euro FX Rate – 2000 to July 2016 (Thomson Reuters)

Gold and silver on the COMEX both rose marginally yesterday – to $1,095.60/oz and $14.68/oz.

Global gold demand fell in the second quarter as China poured funds into equities which had promised better returns according to GFMS. Chinese stocks have collapsed by 30% in recent weeks – a real case of out of the frying pan and into the fire.

Imports by India dropped to the lowest in five quarters, the quarterly report said yesterday.

A plunge in Chinese share prices from mid-June has not helped bullion in the short term according to the report. However, we believe that the plunge in Chinese stocks will be bullish in the long term as the Chinese again realise the importance of gold as a safe haven asset.

GFMS is optimistic that global demand and prices could start to pick up in the final quarter of the year. China and India are the world’s top gold buyers and demand for the entire year is expected to be elevated and near record levels seen in recent years.

This morning in European trading, silver for immediate delivery is 0.4 percent lower at $14.70 an ounce. Spot platinum rose 0.3% percent to $990 an ounce, while palladium rose 0.5% percent to $626 an ounce.

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