Bank of Portugal’s selective transfer of bonds from Novo Banco back to Banco Espírito Santo is the first test to the “no creditor worse off” rule under EU’s new bank recovery and resolution regime. It remains to be seen whether this measure was a one-off now that the Single Resolution Board has taken over from national resolution authorities.
“Portugal’s central bank has offered to partly compensate Novo Banco bondholders who lost money when their securities were transferred to a “bad bank” last month in a bid to ease tensions with the government and furious international investors.”
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Investors should price in the risk that EU authorities may exclude from bail-in bondholders of the same class, the Financial Times’ Lex column argues.
“Banks in urgent need of capital have no easy options. State bailouts sow moral hazard and raising equity or selling assets is hard, particularly at a moment of public weakness such as the aftermath of a failed stress test. The fashion now is for bondholders to step up and absorb losses, almost as if they owned equity. Fairness and prudence require that losses be dispersed evenly across all bondholders — so the hit is painful to all, but lethal to none.”
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New EU bail-in rules spread fear among large depositors and senior bondholders, the FT reports.
“In both the Greek and Italian cases, banks were rushed into recapitalising before the new EU regime came into force on January 1, which could have meant losses for large depositors. When depositors have been bailed in before — such as in Cyprus three years ago — it has caused public fury and economic instability.
However, it is the Portuguese situation that has most upset investors. The central bank chose five senior bond issues out of a total of 52 to move from Novo Banco to the “bad bank” it set up to hold its toxic assets after a bailout in mid-2014.”
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