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16 July 2012

WSJ: Europe's bank shifts view on bond losses


The European Central Bank advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks, though finance ministers have for now rejected the approach.

The ECB's new position was made clear by its president, Mario Draghi, at a meeting of eurozone finance ministers discussing a rescue for Spain's struggling local lenders in Brussels the evening of July 9.

It marks a contrast from the position the central bank adopted during the 2010 bailout of Irish banks—which, like Spain's, were victims of a property meltdown—when it prevailed in its insistence that senior bondholders in bailed-out banks shouldn't suffer losses.

The ministers' decision confirmed a pattern in the eurozone for dealing with bank troubles in which senior bondholders have been spared even in the most brutal failures. But the ECB's shift may be a sign that the tides are turning on the issue, as the eurozone embarks on a fundamental overhaul of the way bank failures are dealt with within the currency union.

One element likely to increase pressure to force losses on senior creditors is a plan, agreed by eurozone leaders at a summit last month, soon to allow the eurozone's bailout fund directly to recapitalise failing banks—instead of lending the funds, as at present, to the banks' host governments. That would put European taxpayer money directly on the line for saving banks in other countries. Officials from rich northern countries, led by Germany, have said that taking joint responsibility for bank rescues is possible only if recapitalisations don't create major losses—a strong case for putting a heavier burden on private investors.

Full article



© Wall Street Journal


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