Bank bailouts in the Eurozone, like bank bailouts elsewhere, have made owners of otherwise worthless bank debt whole through a circuitous process where, in the end, taxpayers transferred their money to investors. Even in Greece, investors were coddled. Even Proton Bank that had siphoned off $1 billion in a scheme of fraud, embezzlement, and money laundering was bailed out at taxpayer expense.

By contrast, private-sector holders of Greek government debt, such as hedge funds who’d bought this crap for cents on the euro, got ugly haircuts of over 70%. Public-sector holders, like the ECB, got off scot-free. It wasn’t fair. But fairness had nothing to do with it. These were bailouts! That’s how it was done. Until now.

SNS Reaal, fourth largest bank and insurance group in the Netherlands, cratering under a huge load of rotting real-estate loans, was bailed out on February 1, after already having been bailed out in 2008, and nationalized with a €10-billion package.

A collapse and bankruptcy “would have unacceptably large and undesirable consequences,” explained Dutch Finance Minister Jeroen Dijsselbloem, confirming that bank bailouts would be the norm in the Eurozone. Only question: to what extent would taxpayers be sacrificed? In the SNS bailout, all depositors were made whole. But stockholders were wiped out. And so were holders of junior debt!

Tremors went through the system. Stories surfaced of individual holders, such as artists, who’d lost their savings because they’d bought these crappy bank bonds that had been touted as safe. Alas, that junior debt would have been worthless anyway in a bankruptcy, retorted Dijsselbloem and stuck to his semi-hard line—semi-hard because holders of senior debt and covered bonds were still bailed out by taxpayers.

On Monday, the Dutch Council of State blessed that procedure and thus set an example for the rest of the Eurozone: when a bank is bailed out and nationalized, owners of its debt can lose their entire capital. The unwritten government guarantee on bank debt is off.

A government finally drew the line on one of its big banks, instead of flailing about to justify why taxpayers had to bail out bondholders who’d benefitted from the yields that had compensated them for the risks. Why tolerate a situation where the capital “at risk” wasn’t at risk?

That exotic theory is already spreading. Dijsselbloem is President of the Eurogroup that approves country bailouts. And the German government has been toying with the idea of going after bank investors for months. At issue: the bailout of the banks in Cyprus. But there, it’s more … delicate. These banks didn’t issue a lot of debt. They didn’t have to; they were flooded with deposits from rich Russians, Russian companies with mailbox subsidiaries in Cyprus, and even Oligarchs.

As more stories about the Russian connection surfaced, the unwritten government guarantee of uninsured bank deposits has been fraying around the edges. The Cypriot government, unlike the Dutch government, cannot bail out its own banks. It’s bankrupt too and needs a bailout. So, which bank stakeholders get bailed out and which get sacrificed will have to be negotiated with the Troika. Even deposit accounts aren’t sacrosanct anymore, and their owners, the “rich Russians,” are being prepped for a haircut, a mild one presumably, not a crew cut. Nevertheless, it would break another barrier.

Next? Senior bank debt. Its unwritten government guarantee has not yet been broken, and any attempts to do so would be met with determined opposition by the banks themselves. Once investors in senior debt realize that they could lose their capital, they would, in theory, demand higher yields to compensate them for the risk—thus raise the cost of funds for banks and squeeze their margins.

So far in the Eurozone, it has just been one major bank, but not a TBTF bank, where junior debt holders lost their shirts. More such bank bailouts would have to take place before investors accept them as reality and price that risk into the equation. Then, they might actually try to look at the crap these banks have hidden in their basements.

In theory. In practice, central banks rule. Their money-printing operations and asset-purchase programs have distorted the markets. Risk has been wrung out of the equation. If a bank is TBTF, it wouldn’t be the taxpayer to bail it out directly, but the central bank, as the Fed had done, beyond the reach of democratic processes or controls, with amounts that dwarf what the taxpayer could do, generating huge profits for bailed out investors and those betting on these bailouts, and in the process devaluing the currency for everyone else.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.