Holding Bonds Is Getting Riskier in Europe

Last week, the Netherlands nationalized its fourth largest bank, SNS Reaal, and to reduce the cost wrote down the value of the bank's subordinated bonds to zero.

This isn't the first time that subordinated bondholders (investors lower down on the food chain when it comes to getting paid back) have suffered in the euro area's financial crisis. That precedent was set in Ireland, where senior bondholders were made whole but junior bondholders took a hit on their bank bonds. Since the beginning of the Irish crisis in 2008, about 14 billion euros ($19 billion) of the total 26 billion euros of subordinated debt has gone unpaid.

In the Netherlands, subordinated debt of about 1 billion euros in SNS Reaal was written down to zero. Finance minister Jeroen Dijsselbloem justified this by saying: "Their claims entirely lose their value, which would also have happened if SNS had gone bankrupt."

The move caused a bit of an uproar in the Netherlands, and the swift, aggressive way in which investors lost their money may have contributed. Investors were probably more upset still by a comment that Dijsselbloem made at the end of his announcement about the nationalization of SNS Reaal: He admitted that he had also considered burning senior bondholders and hoped they would be included in bail-ins in the future.

Burning senior bondholders has been taboo in Europe. For now, they appear to be safe, but political pressure to make them share the pain is growing, and they might want to keep an eye on Dijsselbloem. He holds a lot of clout in Europe, having just been placed at the helm of the euro area's group of finance ministers.

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