The author attempts to put a case that would essentially place liability on the bondholders that finance banks upon the occurrence of financial crisis. This would depart from the common practice in which the bank bondholder is protected and safe from the adverse effects that hit the financial world upon collapse of the system. He equates this latter practice to impunity and signals its end in the events that characterize the Spanish financial system where the bank financiers are likely to suffer losses. The developments in America and Europe have seen the attempt by policy formulators to amend the law so as to make the bank bond convertible into equity. This would be pursued in the event of financial crisis as a stop gap measure to contain the losses. While this would suffice for reducing the enormous responsibility placed on the tax payer on bailing out failed systems, it is likely to increase the costs of borrowing from the banks hence would affect the citizenry in the long run.
The bank bondholders’ position is equated to a cake of layers in which the bottom layer usually incurs the most weight yet more than often benefits the least. The bond holders, incidentally, are protected from losses yet are the first to earn the profits on investment. This situation has been associated to have worsened the financial crisis in Europe in which the bank bondholders, who, are largely senior citizens had to be compensated. The same problem is taking Ireland to the dogs financially speaking. The Spanish bailout appears to have turned the tables in that the bailers are hesitant to use taxpayers’ resources to offset the debts to bondholders. Further, progressive nations such as Britain, Switzerland and European Union are already legislating for the bank debt to be compulsorily convertible into equity during financial crisis. This would effectively reduce the financial pinch on the taxpayer while increase liability on the bank bondholder. However, this should be pursued in light of the bank creditors’ ability to get their lending secured, cushioning them from the financial losses during financial crisis.
Works Cited
Kambayashi, Satoshi. "Burning sensation:Taxpayers should not pay for bank failures. So creditors must." 21 July 2012. The Economist. 29 September 2012 <http://www.economist.com/node/21559344>.
