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Bail In or Bail Out

by kraju

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A spokesman from the International Monetary Fund (IMF) said the IMF did not have any discussions with Greece for a third bail out, as the current programme will continue till 2016. Greece has been bailed out twice since 2010 with € 240 billion worth agreements co-ordinated by the Troika (European Central Bank, IMF, European Union), however, the IMF estimated last month that the debt ridden European country will still have a funding gap of € 11 billion in 2014-15. Speaking to “The Guardian”, Greek finance minister, Yannis Stournaras said the country would not need a third package from the troika, he said Athens would seek funding from international capital markets from which it has been excluded since 2010, provided it fulfilled two conditions, securing a primary surplus (which means income is higher than the expenditure but an overall deficit still prevails i.e. income  is less than expenditure+interest) and a  positive growth rate (after 6 months of economic contraction).

Bailout Explained

In the bailout approach, banks that falter are injected liquidity through government and tax payer backed initiative. The total amount of funds to be given for a bail out will be decided by external financing agencies such as IMF, or any agency overseeing the  bail out and depends upon the report submitted by their officials assessing the debt situation prevailing in the country. The burden will be borne by the external agency. The government will use the tax payer’s money for overcoming the crisis of failing banks. 

(BailIn)Scenario: 2

Earlier in June this year, the EU imposed “bail in” rules to ensure the taxpayers are protected in case of failure of banks and the losses in turn would be imposed on large depositors, shareholders and bondholders. The new guidelines have the aim of ensuring that tax payers are not the first in line to take on the burden of banking failures following the a European debt crisis that required states to bail out banks from tax payers money.

The term “bail in” was first used by the magazine “The Economist”, it happens when the borrower’s creditors are asked to bear some of the burden by having a certain percentage of their debt written off. European governments initially avoided resorting to bail in’s thinking that it would cause panic among creditors of other banks, however, protests by the tax payers and by politicians coupled with severe losses to the government on account of repeated bail outs has seen the appeal of asking the creditors to share the losses arising from the banks. 

Bailin Explained

The burden of rescuing faltering banks will be shifted from tax payers to the creditors and share holders. Under the new rules imposed by the EU, a bank must bail in a minimum of 8 percent of its liabilities before it can gain access to public funds. Deposits from individuals of £ 85,000 or less shall be protected. Burden will be shared among the creditors and shareholders of the bank. The bank resolution and recovery directive says under the deal, bank share holders will be the first in line for assuming the losses of a failed bank before bond holders and certain large depositors, this will stand effective after 2018. 

Consider the two scenarios, bail out happens when external investors rescue a borrower by injecting money to overcome their debt and help the banks or countries overcome the crisis. Bail outs of failing banks in Greece, Portugal and Ice land were primarily financed by tax payers.

The above differences are coined based on the EU based bank resolution and recovery directive and are applicable to those countries and banks which fall under their scope.

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