Instead Of Doing His Job, Jeroen Dijsselbloem Has Given Us A Glimpse Of The Euro 'End Game'

If you've been following the Cyprus bailout story at all, you're probably familiar by now with Jeroen Dijsselbloem, the Dutch Finance Minister who became President of the Eurogroup of euro zone finance ministers in January.

As President of the Eurogroup, Dijsselbloem has one extremely important job: communicating to the public the decisions taken by the group. After all, he is the figurehead.

And for all of the fear that the Cyprus bank bailout deal – which, per the Eurogroup's wishes, forces haircuts on uninsured depositors – has caused elsewhere in Europe in recent days, Dijsselbloem really hasn't been doing too well on that front.

It's important for European leaders to portray Cyprus as a "special case." Otherwise, depositors at other banks in Europe could get spooked, thinking they might be next to take a hit. The same goes for bank bondholders.

So, European leaders have done their best to stress that the Cypriot bank bailout is just that: a special case.

That is, except for Dijsselbloem, who has basically spent the first two days of this week, following the inking of the Cyprus deal on Sunday night, going on and on about how this is not, in fact, a special case.

Yesterday, in a bombshell interview with Reuters and the FT, Dijsselbloem essentially said Europeans can count on a similar fate for uninsured deposits elsewhere in the euro zone if their banking systems need to be restructured in the future.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'" said Dijsselbloem in the interview. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."

Yikes.

FT Alphaville editor Paul Murphy called for Dijsselbloem's firing for making those comments. Several others have lashed out at Dijsselbloem for his apparent ineptitude.

The market reaction (bank stocks tanked) even caused the Eurogroup to issue a two-sentence clarification of what Dijsselbloem said.

However, the Eurogroup statement didn't really refute anything he actually said. Instead, it seemed to be an attempt to combat the use of the word "template" in describing the Cyprus deal, which is how Reuters played it in the lede.

And when you look at the full transcript of the interview, which the FT published online today, it's clear that Dijsselbloem absolutely meant what he said.

In fact, Dijsselbloem's comments seemed to anticipate and perhaps even invite the negative market reaction that ensued and later caused the Eurogroup to issue a clarification.

"If I finance a bank and I know if the bank will get in trouble, I will be hit and I will lose money, I will put a price on that," said Dijsselbloem in the interview. "I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector."

The man is clearly trying to stress the "free market" approach.

For most people, whether they agree with Dijsselbloem on that is a political issue.

One thing is for sure, though – the "free market" approach also happens to be the exact opposite of what investors in Europe are counting on right now, so talking about it is definitely frowned upon.

Thus, one might expect Dijsselbloem to keep quiet about scaring European depositors after yesterday's somewhat humiliating turn of events.

But Dijsselbloem won't give it up! The soundbites today were almost laughable, given how yesterday went down. He went before the Dutch parliament today and told them that a levy on wealth like the one considered in Cyprus was defensible in principle.

Really, Dijsselbloem? Why would you say something like that?

Credit Suisse analyst William Porter ruminated on the problem Dijsselbloem seems to be having lately in a recent note, the title of which posed a very simple question: "What if they're not stupid?"

"With one or two exceptions, comment and 'analysis' of the Cyprus situation have had a theme that authorities are 'stupid' and 'have shot themselves in the foot'," writes Porter.

But Porter isn't buying it.

"An immediate corollary of ruling out the “stupidity” assumption is that if we can see something, the authorities can see it too," says Porter. "We try to be quicker, and they might not all see it at once. But we have to assume they see it."

Here is the key point, from Porter, though: "And what we see (the difference from the authorities is we can also say it) is a situation well short of its defining moment ... we still see a banking system in deep disequilibrium, with a large number of banks making no money and with no prospect of doing so. We see the Cyprus bank holiday as a foreshock."

What does that mean? It means more bail-ins for Europe. It means everybody knows it has to be done in the long run, but nobody wants to say it in the short run.

And of all people, it's certainly not Dijsselbloem's job to say it.

So, instead of keeping things on an even keel – as a Eurogroup president would probably be well-advised to do in this situation – Dijsselbloem has given us a glimpse of the "end game" in Europe.

BofA analyst Hans Mikkelsen explained what that means in a note to clients this morning:

The initial market reaction to the bailout crisis for Cyprus highlighted the eventual end game of the handover of credit risk from sovereigns back to the private market. Recall the big theme of the financial crisis, where sovereigns from the US to Europe absorbed credit risk from the private sector through explicit bailouts and implicit guarantees. The bail-in of senior bondholders and depositors in Cyprus represents one of few examples of the reversal, where credit risk has been handed back to the private sector. A key focus in the markets has been the extent to which the situation of such a small country sets a precedent for the rest of the Eurozone.

Thus in response to Cyprus - from March 15th to early this morning - Italian and Spanish sovereign bond spreads had tightened about 10bps while senior bank CDS spreads in the two countries had widened 20-35 basis points. Of course through the day the market became increasingly concerned about the systemic implications of this development – without sufficient underlying fundamental improvement - and both sovereign and bank spreads widened significantly. Clearly the US banking sector, with most major banks having completed the necessary balance sheet repairs after the financials crisis and an improving economy, are much better positioned as new regulation does away with “too-big-to-fail”.

It's clear that there is little appetite in the chambers of Brussels for saddling already heavily-indebted euro area member states with more public debt, which is what bailouts that don't contain some kind of "bail-in" (like from depositors, in the case of Cyprus) necessarily do.

So, while they can't really talk about it, there should be little doubt about where they want to take the European banking system going forward.