Fear and greed rule financial markets. When it comes to bank bondholders, the delicate task facing financial regulators is somehow to keep these two emotions in check. Make investors too fearful, and they will drive up the cost of borrowing for everyone. Unleash their animal spirits and risks will be underpriced. Fear first. On June 27th the European Union formally agreed that regulators should "bail in" bondholders of banks that run into trouble. This overturns an implicit, and oft-acted-upon, promise by governments to use taxpayers' money to save failed banks, and thereby rescue the creditors that had foolishly lent them money.
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