A couple of weeks ago, Merkel made the (in)famous public comment about private bondholder liability towards sovereign debt and this was followed by the IMF's Strauss-Kahn's public comment that the Irish problem was a banking one, due to one bank in particular (obviously Anglo).I actually think they will let a certain number of banks crash. This has a positive effect - as the domino falls deposits migrate to perceived stronger banks thus giving them a free recap as it were. Fewer players leads to a more profitable platform and a tighter bind between the institutions (EU and financial).
Now, the bail-out plan requires the actual closure of Anglo.
Closing it, on it's own, would restore confidence.
The question then is the detail of the "closure".
More recent comments from the ECB suggest bondholder liability would be tackled on a "case by case" basis, post-2013.
Anglo liquidation would seem a logical and ideal candidate for the implementation of the theory, but the implementation, such is the intensity of the crisis, would/could begin next month.
I am guessing that under Irish or EU law, the banks debts could be removed from the sovereign guarantee on the basis that the bank lied/defrauded the government.
Again under Irish/EU law, the bank would be liquidated with the unfortunate bondholders taking a hit, or alternatively the ECB taking on the liabilities and dealing with the bondholders itself.
Is this legally possible?
If so, markets may or may not panic.
I would guess that if it proven that Anglo acted illegally, it would be acceptable to markets that it's bondholders would have to assume a liability for it's debts. Thems the rules, and justice would be seen to be done.
The EU needs to set a precedent and this is an ideal opportunity.
I posted this scenario a couple of weeks ago asking was it possible or illogical and it wasn't contradicted, though it was probably ignored.