(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
By Fiona Maharg Bravo and Neil Unmack
MADRID/LONDON, July 11 (Reuters Breakingviews) - Spain’s economy minister Luis de Guindos recently said bank preference shares should never have been sold to mainstream retail investors. It’s easy to see why. Euro zone lenders may be about to force Spain to follow Ireland and impose losses on junior creditors of bailed-out banks, many of whom are retail clients. This would be deeply unpopular and carry risks. But it is the right way to reduce the cost of Spain’s mega bank bailout.
The Irish experience was not pleasant for subordinated debtholders. The government had a powerful stick in the form of new laws that allowed it to change the terms of their securities. Investors recovered on average around 20 percent of face value.
Brussels has decided that Spain’s bank bailout should be accompanied with similar legislation and force junior creditor losses “to the full extent possible” - although it’s not clear what that means. BBVA and Santander aside, Spanish banks have 47 billion in subordinated debt, according to Barclays’ estimates. Recently bailed-out BFA-Bankia has an estimated 12 billion euros in subordinated debt, including preference shares.
The threat of new legislation might itself encourage voluntary haircuts via debt exchanges. Under the current rules, lenders needing state support would have to buy investors out for no more than a 10 percent premium to the market price. Given that even the most beaten-up of these bonds currently trade at discounts of 70 percent of par, creditors probably face more modest losses than in Ireland.
Spain needs to tread carefully. The preference shareholders of Spain’s four nationalised banks are also their best clients. In Bankia’s case, they lost a packet in its initial public offering too. Clients complain they thought they were investing in a quasi-deposit. Upsetting them may trigger deposit flight and compensation claims. Spain is also being asked to pass tighter regulation in this area.
But Madrid can’t afford to be too gentle on these creditors, whether institutional or retail. The euro zone won’t cover capital shortfalls if related debt exchanges are botched. And it could have been tougher. So far there’s no suggestion of forcing losses on senior creditors.
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- Spanish holders of hybrid capital and subordinated debt in bailed out banks will have to take a haircut on their investments in order to minimise the cost to taxpayers, according to a memorandum of understanding for the up to 100-billion-euro European bailout for Spanish banks.
- The Spanish government must adopt legislation to allow for mandatory haircuts on subordinated debt. According to the memorandum, the Bank of Spain will “immediately discourage” any bank which may need to resort to state aid from exchanging subordinated capital at a premium of more than 10 percent of par above market prices until December 2012.
- On July 3, Economy Minister Luis de Guindos said preference shares should never have been sold to retail clients. At the time, he said entities receiving state aid would have to agree to EU competition rules, but that Spain would search for the best possible solution that would minimise the impact on preference shareholders.
- Reuters: Spain deepens austerity under European pressure [ID:nL6E8IB2SP] - For previous columns by the authors, Reuters customers can click on [UNMACK/] and [BRAVO/]
(Editing by Pierre Briançon and David Evans)
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