Fitch Says Senior Creditors May Lose in Spain Bank Rescue

Senior debt holders in Spanish banks that aren’t viable may risk losses as the European bailout of the nation’s lenders seeks to limit the cost to taxpayers, Fitch Ratings said.

While the rescue agreement “does not explicitly impose burden-sharing on senior debt holders,” the terms “could be interpreted as implicitly suggesting that senior debt holders could face potential losses in the case of ultimately non-viable banks,” Fitch said today in a statement from London.

Spain sought the 100 billion-euro ($124 billion) rescue on June 9 for banks reeling from real-estate losses five years after the property bubble burst. The European Central Bank would no longer oppose the imposition of losses on senior bondholders if the bank in question is being wound down, two officials with knowledge of the ECB’s thinking said on July 16.

The ECB’s position has evolved since it opposed forcing losses on the senior creditors of Irish banks after the government started injecting capital into the lenders in 2009. At the time, the ECB argued that reneging on senior Irish bank debt would damage financial stability in the euro area.

Fitch also said it is “cautious” as to whether the bailout will be the “final reform of the Spanish banking sector.” Banks that have already been taken over by the state, including Bankia group, are set to be the first to receive European funds, the Spanish government has said. No date has been set for the first disbursement from the rescue package.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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