ECB hints at shift on bondholder policy

An ECB source has said the Frankfurt-based institution would like to see senior bondholders included in the restructuring of banks as part of the EU bailout of the Spanish banking system.

But European Commission spokesman Simon O’Connor said senior bondholders will not be included in private sector involvement as part of the restructure.

The treatment of senior bondholders in Spain has huge implications for the Government in negotiations with the troika on the restructuring of Irish bank debt. Irish taxpayers shouldered the full burden of paying off the senior debt owed by the banks.

It has cost the Government €64bn to rescue the banking system of which €34bn is in promissory notes relating to the now defunct institutions Anglo Irish Bank and Irish Nationwide.

The ECB source said senior bondholders in Spanish banks could be involved in private sector involvement in the event of a Spanish bank restructuring but only if a Euro-wide special resolution regime is in place.

The next EU summit, due to take place in October, will consider plans for a banking union, including a resolution regime along with a rescue fund, a deposit insurance scheme and a single supervisory agency.

The ECB source said that the circumstances of the restructuring of the Spanish banking system are different to what happened in Ireland. The Government put a full state guarantee behind the banking system in Sept 2008, which made any haircut of senior bondholders tantamount to a sovereign debt default.

Moreover, there was no special resolution regime in place when the Irish banking system was being restructured.

But if the senior bondholders are included in Spanish bank restructuring, it will strengthen the Government’s hand as it looks to have much of the cost of rescuing the banking system hived off to the ESM.

But Mr O’Connor said the Memorandum of Understanding drawn up by the commission for the bailout of the Spanish banking system does not include senior bondholders in any private sector involvement.

“The commission will look at any private sector involvement once a bottom-up stress test of the Spanish banking system is completed; the capital needs are known and the restructuring plans have been drawn up.

“But private sector involvement will only include hybrid and junior debt, we do not plan to include senior bondholders.”

Brussels-based economist with ING Bank, Carsten Brzeski, said it is unlikely that senior bondholders will be included in the restructuring of Spanish banks because the troika would then have to change the terms for Ireland. “It would be extremely unfair otherwise.”

He believes the ECB wants private sector involvement to include senior bondholders as part of a special resolution regime in the future, but it will only come into place after the restructuring of the Spanish banking system.

He said the ECB’s stance chimes with recent comments made by European Commissioner Michel Barnier that European taxpayers should not have to shoulder the losses in the event of a collapse of a European bank.

But Mr Brzeski said this will lead to a higher cost of funds for banks, because they will have to pay higher rates on bonds that they issue, which will have a knock-on effect for the economy as this will translate into higher borrowing costs.