Spanish policy makers are considering forcing investors who hold equity and junior debt in banks to absorb losses in a restructuring, according to a person with knowledge of the plan.
Such burden sharing is among conditions being negotiated with the European Union in a 100 billion-euro ($126 billion) rescue for Spain’s financial industry, said the person, who asked not to be named as the conversations are private. Depositors who bought subordinated instruments such as preferred stock may be partially shielded from losses through a compensation plan being considered, the person said.
Spain is poised to make a formal request for aid after asking for the credit line on June 9. The country’s lenders, rocked by the end of a real estate boom, would need as much as 62 billion euros in capital in a worst-case economic scenario, according to Roland Berger and Oliver Wyman, consulting firms hired by the government to conduct stress tests.
“Many retail clients have seen the preferred shares as safe investments comparable to deposits,” said John Barden, a London-based fund manager at Matrix Alternative Asset Management LLP. “Spain have to finetune exactly what they will do to avoid hitting investor confidence.”
Sharing costs with investors was a measure Irish policy makers used in the bailout of their banking industry. Ireland raised about 15 billion euros, equal to about 10 percent of the country’s economic output, since 2009 from sharing losses after the collapse of the real-estate market sank the financial industry. Ireland introduced emergency laws in 2010 allowing the state to impose losses on junior holders of bank bonds.
The European Central Bank rejected Ireland’s bid to burn senior bondholders, concerned that such a move would undermine confidence in the banking system.
Spain’s Economy Minister Luis de Guindos said officials don’t plan to impose losses on debtholders. “There’s nothing like that,” he told reporters in Luxembourg today after a meeting of his European counterparts.
No decision has been made on conditions of the Spanish aid as no formal request has been made on the bailout, said the person. The bid will happen “within days,” De Guindos said.
“We have advanced on the terms and the conditions regarding the financial assistance for Spain,” De Guindos said, without disclosing the conditions being negotiated.
EU policy makers are discussing so-called bail-in rules under which regulators will have the power to impose losses on holders of senior unsecured debt, as well as derivatives counterparties, once a lender’s capital and subordinated debt are wiped out.
Amadeu Altafaj, spokesman in Brussels for EU Economic and Monetary Affairs Commissioner Olli Rehn, declined to comment.
Burden-sharing rules typically provide incentives for investors to participate in buybacks with banks being restructured.
Deposit-taking institutions in Spain had 241 billion euros of equity, including 50 billion euros of capital instruments and an endowment fund, according to Bank of Spain data as of end of April.
The European Commission and Spanish government officials are negotiating conditions on the rescue for banks that get aid as well as for the entire financial industry, which may include rules on liquidity and loan-to-deposit ratios, said the person.
The government in Madrid is also considering giving more power to the national regulator to restrict sales of loss- absorbing securities such as preferred stock to individuals, said the person. De Guindos has said that preference shares shouldn’t have been sold to retail investors.
Supervisors “failed” over the sale of preference shares to retail investors, said De Guindos June 5 in the Senate.
Spanish lenders sold 22.4 billion euros ($28.2 billion) of preferred stock to individual investors through retail branches. Banks have offered clients holding most of that amount to swap the securities into common stock or other subordinated instruments, according to data compiled by CNMV, the financial markets supervisor. In a bail-in, investors in all those securities would be wiped out before holders of more senior bonds, which tend to be banks and institutions.
To contact the reporter on this story: Esteban Duarte in Madrid at firstname.lastname@example.org