This article considers the effects of a rescue of SNS Reaal for a group of private investors that bought certain ‘participation certificates’. I am not exactly sure what these are but they are apparently bank obligations with high risk and high interest. They sound to me like the devices the Spanish banks devised to raise capital.
While details of the bank rescue package and its impact on bondholders have yet to be worked out, most analysts are busy speculating that subordinated debt holders will be forced to contribute to the recapitalisation effort. But as I say any such ”bail in” would involve subordinated debt holders – and in particular holders of hybrid instruments like preference shares – taking losses. The hierarchy is just like that, you can’t haircut seniors before you have hit “juniors”. These are the banks own customers, who were basically sold the instruments on the understanding that they were “just like deposits” and very low risk. Bank of Spain inspectors warned Minister Pedro Solbes in a letter in 2006 that these very instruments were being sold to finance high risk developer loans, but no action was taken. Far from making irresponsible investors pay this measure would penalise the very people who help keep Spain’s banking system together, those small savers who forwent going for holidays on credit to Cancun, Thailand or Japan, and failed to increase their mortgages in order to buy lavish SUVs in an attempt to save for their retirement. These are the people who now face the prospect of losing their precious savings to cover the losses generated by those who did both of the above.
And beyond this issue of subordinated debt is a warning from Fitch (via Yahoo News:
A writedown of bonds however would affect the ratings of Western banks, the FD daily quoted ratings agency Fitch as saying on Thursday.
“If an important country in Europe writes down the ordinary bonds of a problematic bank, that means a complete change in how we look at banks,” Bridget Gandy, head of European bank credit ratings at Fitch said.
The Dutch Finance Minister and soon-to-be Eurozone leader Jeroen Dijsselbloem claimed that Fitch made ‘reasoning mistakes’ but as SNS is a current case, could not further explain the issues. In any case, also the Dutch government sees SNS as too-big-to-fail.