July 10, 2012 8:24 pm Spain pressed to inflict losses on small investors

By Miles Johnson in Madrid, Peter Spiegel and Joshua Chaffin in Brussels


European authorities are pressing Spain to inflict billions of euros of losses on small investors by wiping out certain types of bank debt before its financial institutions are recapitalised using eurozone rescue funds.

The bailout conditions for Spain’s banks would force any lender taking aid fully to write off their preferred shares and subordinated bonds, according to a draft memorandum of understanding seen by the Financial Times.

“Banks and their shareholders will take losses before state aid measures are granted and ensure loss absorption of equity and hybrid capital instruments to the full extent possible,” the document says.

Spanish banks have €67bn of subordinated and hybrid debt outstanding, according to Bank of Spain, much of which was sold to retail investors as savings products.
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“The difference between Spain and other European countries is that these instruments are held mainly by retail investors,” said Daragh Quinn, a banking analyst at Nomura. “People who bought them might not have known exactly what they were investing in”.

Luis de Guindos, Spain’s finance minister, has admitted that investors should not have been sold the savings products and he had sought to minimise their potential losses under a eurozone rescue. “It was an error to sell the preference shares, and we will have to look for solutions,” he said in May.


Under the agreement, Spain will have to extend consumer protection rules and restrict the sale of such financial instruments to retail clients.

Eurozone finance ministers signed off on the draft agreement for the €100bn Spanish bailout programme in the early hours of Tuesday, including the first payment of €30bn by the end of the month.

The conditions imposed will also see a transfer of supervisory power from the Bank of Spain to the European Commission, IMF and European Central Bank, with the Spanish central bank required to provide them with regular updates on the liquidity of bailed out banks, and asked to launch a review of its own supervisory procedures.

The agreement is expected to be formalised on July 20, and Olli Rehn, the EU commissioner for economic affairs, said the €30bn would be used as a “contingency reserve” until a full assessment of individual banks’ needs is completed in September.

“It’s always useful to have a certain reserve for possible unexpected developments,” Mr Rehn said. “It certainly will help to restore and reinforce confidence in the Spanish banking sector.”

The rescue loans, conditional on reforms by specific banks and Spain’s broader financial sector, will include quarterly monitoring missions by officials from the European Commission, European Central Bank, and International Monetary Fund, Mr Rehn said. But these reviews will not cover Spain’s sovereign books as they have in other eurozone bailouts.

The possible losses for retail investors in Spain comes as the ruling Popular party government led by Mariano Rajoy dropped its opposition to a public inquiry into the €23.5bn nationalisation of Bankia, in which hundreds of thousands of savers who bought into the lender’s stock market listing suffered large losses.

Rodrigo Rato, Bankia chairman before the rescue and former managing director of the International Monetary Fund, will be called to testify in front of Spain’s parliament. Other witnesses to be called to hearings starting next month are the former economy ministers Elena Salgado and Pedro Solbes.

Although eurozone officials agreed on how the Spanish programme will start, there was continued division on how it will be completed. Mr Rehn reiterated that bailout loans from the new eurozone rescue fund, the European Stability Mechanism, will eventually be injected directly into Spanish banks, allowing Madrid to take the bank liability off its national books.

But Wolfgang Schäuble, the German finance minister, said on Tuesday morning that no formal decision had been taken on how that would work and left open the possibility that Spain could still be asked to guarantee the ESM against losses if the bailed-out banks defaulted on their rescue loans.

Copyright The Financial Times Limited 2012.