In your editorial "Another Lousy Bank Bailout" (Aug. 5), you criticize the Portuguese government's decision to protect senior bondholders in the resolution of Banco Espírito Santo. You say that "Bondholders also aren't guaranteed, or shouldn't be, and forcing them to take losses would also be a welcome lesson in risk management." I see your point in principle, but I would observe that in practice market discipline cannot operate in a market in which the financial reporting provides no useful information to investors. This has been the case with European bank accounting.
The European Central Bank is now conducting an "in depth" asset quality review and stress test of the major euro zone banks. Will these efforts provide investors with sufficient information to discriminate between the strong and the weak, such that they can be left to fare for themselves? Given the ECB's prior stress tests, which almost every bank passed, I doubt it. European bank analysis must rely to a great deal on rumor and hearsay until the accounting becomes credible. Market discipline leads to crisis when the financial accounting is useless.
Christopher T. Mahoney
Wellsville, Pa.
Mr. Mahoney led Moody's Investors Service's bank rating practice from 1994-2007.