In order to understand why Dijsselbloem’s latest comment hurt the euro, you need to understand the bailout hierarchy in the banking system.

Here is a rough outline of current process when a bank needs money:

  1. Raise money in capital markets (issue stock, etc)
  2. Cut dividends
  3. Wipe out shareholders
  4. Wipe out bondholders
  5. Get taxpayer money

Here is what Dijsselbloem is proposing:

  1. Raise money in capital markets (issue stock, etc)
  2. Cut dividends
  3. Wipe out shareholders
  4. Wipe out bondholders
  5. Wipe out uninsured accounts
  6. Get taxpayer money

In his own words:

“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?’. 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,” he told Reuters.

In some ways, this makes sense. Having a 100K limit on deposit insurance is pointless if the taxpayer effectively backs all accounts. It really shouldn’t have been the lowly Irish tax payer bailing out accounts at Allied Irish that were never guaranteed.

That said, Dijsselbloem is an absolute bumbling idiot on the timing of his comments. Depositors are already scared and he gave them a reason to be terrified. Italian banking shares are getting hit hard on fears they could be next.