The finance ministers of EU nations set rules for bank bailouts, which put the primary pressure on bond and stock holders. It sets up the kind of public/private war that already has happened with sovereign paper — particularly Greece’s. That means that, although a mechanism is in place, it could be broken if institutional investors reject compromises on bank restructurings.

Bloomberg says of the bank bailout deal:

European Union finance chiefs struck an agreement on how to handle failing banks, a step they said would bolster investor confidence and help overcome the euro-area financial crisis.

In seven hours of emergency negotiations in Brussels that wrapped up at about 1:30 a.m. today, ministers settled on guidelines for assigning losses to private creditors and regulating public assistance. They also spelled out when governments can step in and established a role for the European Stability Mechanism, the euro area’s 500 billion-euro ($651 billion) firewall fund.

The power they believe they have is illusory, because “private creditors” may not go easily.

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