We bet that you have heard about bailout (if not, you are welcome to read our take on bailout here). But bailouts are so yesterday - do you know what a bail-in is?
In a sense, it is similar to bailout, as it also assumes providing financial help to a company in financial distress. The aim of bail-in is to keep the borrowing institution afloat, just like in the case of bailout. However, they take different approaches to accomplish this goal. Bailout relies on external aid, in particular on government’s, or taxpayers’ support. Meanwhile, a bail-in provides a rescue through internal recapitalization, i.e., it forces the institution’s creditors to bear some of the burden by taking part in the debt write-off or its conversion into equity.
The most famous example of a bail-in occurred during Cypriot banking crisis in 2013. To rescue troubled banks, their bondholders and depositors with more than €100,000 in their accounts were forced to part with a portion of their holdings.
Bail-in and Gold
What is the link between bail-in and gold? Theoretically, the impact of bail-in on the gold prices should be more negative than in case of bailout. This is because bail-in can calm the financial market, reducing the safe-haven demand for gold, without the use of taxpayers’ money and without boosting the public debt that could raise concerns about the sovereign debt crisis.
Let’s take the chart below, which shows the gold prices around the Cypriot crisis. The bail-in, coupled with the €10 billion bailout by the European Commission, European Central Bank and International Monetary Fund, was announced on March 25, 2013.
Chart 1: Gold prices (London P.M. Fix, $) around Cypriot bail-in.