Italy senior bonds in line for losses

Italy is set to put senior unsecured bank bonds in line for losses with a law that facilitates writedowns to prevent taxpayer bailouts.

The treasury in Rome will soon amend the order in which a failed lender’s capital will be written off, giving corporate and bank deposits preference over senior bonds, according to a new law implementing the EU’s Bank Recovery and Resolution Directive.

Senior bonds would be wiped out right after equity and subordinated debt, according to the law.

The eurozone introduced rules requiring that bank creditors share the losses of failing banks instead of taxpayers who ended up as paymasters in the debt crisis.

Countries including Germany and Italy now have to amend local laws to remove practical obstacles that could stop them from making creditors take the hit should the time come.

“Changing the law would ensure the Italian banks’ bonds could be written down while deposits are protected,” said John Raymond, an analyst at CreditSights in London.

“A German-style solution makes sense.”

The new Italian law was approved by the lower house on July 2 and the treasury will implement it by decree in the coming months.

The German legislation has been under discussion in parliament since June.

Germany and Italy currently give senior bonds the same priority as deposits and other liabilities needed to carry out critical functions.

That leaves regulators open to legal challenge if they impair senior bondholders while leaving depositors intact.