‘Bail-in’ Risks See Europe Banks Get Downgrade Warning

Today’s AM fix was USD 1,334.25, EUR 971.57 and GBP 798.00 per ounce.
Yesterday’s AM fix was USD 1,333.50, EUR 971.94 and GBP 799.84 per ounce.    

Gold rose $2.30 or 0.17% yesterday to $1,337.40/oz. Silver fell $0.02 or 0.09% at $21.17/oz.


Gold in U.S. Dollars, 1 Year – (Bloomberg)

Gold traded below the highest level in more than four months as investors weighed the crisis in Ukraine against the weakening U.S. economy.

Prices rose 0.3% after a report showed that U.S. companies added much fewer workers than projected in February. The metal climbed to $1,354.87 on March 3, the highest since October 30, as tension between Ukraine and Russia escalated. Bloomberg reports that gold in Singapore  for immediate delivery was at $1,334.86/oz at 2:30 p.m. in from $1,336.90/oz yesterday.

The move towards "bail-ins" and away from government "bailouts" continues to evolve
and yesterday credit rating agency, Standard and Poor’s  (S&P) warned that this could lead to credit ratings for European banks being slashed by one or two notches.

Following similar moves in the U.S., European banks could see ratings downgrades if regulators continue to move towards depositor and bondholder “bail-ins.” S&P signaled that it would review its ratings on banks by the end of April this year.

In the future, rather than banks becoming insolvent and being liquidated and wound up as has happened throughout history, “bail-ins" will force losses on bank’s creditors including depositors as was seen in the testing ground for bail-ins that was Cyprus. Central banks and regulators now think that rather than governments and taxpayers bearing the cost of rescuing failing banks, now creditors including depositors will suffer losses.

"Bail-ins" target both depositors and bondholders. In some cases, bondholders are asked to defer repayment deadlines and can even agree to reduce their claims. If this becomes practice, it could drive up the interest charged by bondholders and have a negative feedback loop.

Some have warned that bail-ins could also damage the wider economy as it could mean that banks have to charge higher interest on their lending as a result. In our research, we have highlighted that bail-ins may have a very negative impact on consumer and business confidence as people’s life savings and cash balances of companies are confiscated as seen in Cyprus. 

S&P said developments in the U.S. towards "bail-ins" meant that its rating outlook on eight U.S. banks had already been impacted and now they are turning their focus on European banks.

The coming bail-in regimes will pose real challenges and risks to investors and of course depositors – both household and corporate. Return of capital, rather than return on capital will assume far greater importance.

Evaluating counterparty risk and only using the safest banks, investment providers and financial institutions will become essential in order to protect and grow capital and wealth.

It is important that one owns physical coins and bars, legally in your name, outside the banking system. Paper or electronic forms of gold investment should be avoided as they could be subject to bail-ins.

Must read guide to and research on Bail-ins can be read here:
Guide: Protecting your Savings In The Coming Bail-In Era (10+ pages)

Mark O'Byrne

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