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The European Commission has released the first paper discussing the methods for defaults of European banks. It may be called burden sharing, restructuring, or just not paying the debt. The paper is a draft, which is open to contributions until March 3rd, and aims for official approval by the summer.

More details brought Tracy Alloway. One can find comfort in the draft, which says that current debt holders might be safe (emphasis, Alphaville):

Fair burden sharing by means of financing mechanisms which avoid use of taxpayer funds.  This might include possible mechanisms to write down appropriate classes of the debt of a failing bank to ensure that its creditors bear losses. Any such proposals would not apply to existing bank debt currently in issue. It also includes setting up resolution funds financed by bank contributions.  In particular the Consultation seeks views on how a mechanism for debt write down (or ‘bail-in’) might be best achieved, and on the feasibility of merging deposit guarantee funds with resolution funds.

The shares of troubled Irish banks, Allied Irish Bank (nyse:aib) and the Bank of Ireland (nyse:ire) are falling. Read more about the possible defaults of Irish banks. Anyway, the Swiss National Bank already refuses to take debt of Irish banks as collateral…

This has been one of the burdens hurting the Euro, which lost critical support, and is now just above 1.30. For more on the common currency, see the EUR/USD forecast.