BREAKINGVIEWS:Spain's bank rescue is part bail-in, part bail-out

Thu Nov 29, 2012 7:57pm IST

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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)

By George Hay and Neil Unmack

LONDON, Nov 29 (Reuters Breakingviews) - Spain’s bank haircuts are part bail-in, and part bail-out. The indebted government has lopped 10 billion euros off its euro zone-funded bank rescue bill by cutting the value of its worst lenders’ hybrid debt. Yet if it hadn’t been for political considerations, the burden-sharing might have been greater.

Take Bankia (BKIA.MC), the biggest of the four so-called “Group One” banks that required the biggest slug of government support. It has handed haircuts of 14-to-46 percent of par value to the holders of its 6.5 billion euros of hybrid debt. When Ireland haircut the holders of similar instruments issued by Allied Irish Banks in January, 2011, the number was a more brutal 70 percent.

The comparative kid-gloves approach is driven by politics, itself the result of the lenders’ approach to selling their hybrid bonds. A large amount of the debt was in the form of preference shares that were sold to the banks’ depositors. Those retail investors are already battling with the consequences of austerity and the Spanish recession. The Irish hybrid debt holders, in contrast, were mostly institutional investors.

The Spanish workaround is to combine a smaller haircut with equity stakes in the bank. Taking into account the haircut and new securities, creditors will receive between 30 and 70 percent of the original investment - for the lowest-ranking prefs and perpetual securities --, and 90 percent for higher-ranking dated subordinated debt, says the Bank of Spain. That looks like a cushy deal for creditors, although giving them equity does mean they remain on the hook for further losses.

However, if the bailout, and further action from the European Central Bank, help Bankia and its peers recover, Spain’s lenient haircut and the debt-for-equity combination would look like a significant subsidy for the hybrid holders. The shares would appreciate, and the state’s stake in Bankia will be diluted.

Ultimately, Spain didn’t have any choice over whether to enforce the haircuts: they were a requirement for a 100 billion euro bank rescue package in the summer. But had it regulated its banks properly in the first place, depositors wouldn’t have bought their banks’ hybrid debt in the first place. Yet another reason why a euro zone banking union does look like a good idea.

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CONTEXT NEWS

- The European Commission approved restructuring plans for four Spanish banks on Nov. 28, confirming that the lenders’ recapitalisation and reorganisation were in compliance with European Union state aid rules. The four lenders - BFA/Bankia, NCG Banco, Catalunya Banc and Banco de Valenci, which form the so-called “group one” banks that relied most heavily on state support - will receive 37 billion euros of European bailout cash.

- Under the restructuring proposals, banks will force losses on junior creditors, including preference shareholders, by haircutting the nominal amount owed, and swapping the residual amount for equity.

- This burden sharing will reduce the total amount of capital injected into the banks by the Spanish government by 10 billion euros, the European Commission said in a statement. “The absorption of losses borne by the banks and their stakeholders will ensure, together with the restructuring measures, a satisfactory burden-sharing and an adequate own contribution to the financing of the significant restructuring costs,” the statement said

- The burden-sharing proposals require preference shareholders and perpetual subordinated bondholders to take a haircut, and receive a portion of equity for the residual amount of their claim. Holders of dated subordinated debt will take a haircut, and choose between receiving senior debt, or equity. Bankia, the largest of the four banks, said that preference shareholders will receive a haircut of 31 percent and receive shares at a price of 61 percent of the nominal value of their claim. Perpetual bondholders will get shares worth just 54 percent. Holders of dated subordinated debt will take a haircut of 14 percent, and receive either shares or new bonds worth 86 percent of the nominal claim.

- Bankia is to cut 6,000 staff, over a quarter of its workforce, and close 39 percent of its branches as part of the restructuring.

- Reuters: Spain to overhaul rescued banks as condition of aid [ID:nL5E8MS4MQ]

- For previous columns by the authors, Reuters customers can click on [HAY/] and [UNMACK/]

(Editing by Pierre Briançon and David Evans)

((george.hay@thomsonreuters.com))

((Reuters messaging: george.hay.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS SPAIN/BANKS

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