Eeny Meeny Miny Moe – EU Bondholders Beware.


The European Union’s new ‘Bank Resolution and Recovery Directive’ – which came into effect on Jan. 1 is now in vogue.

This legislation allows Bondholders – not taxpayers to be liable for banks debts – illiquidity.

I have commented previous on bad banks – which are a new corporate structure created by a troubled bank – in this case the Banco Espírito Santo – to “isolate illiquid / non performing loans / bad debts and high risk securities (assets held as collateral for loans).”

A man walks past an office of Portuguese bank Banco Espirito Santo in downtown Lisbon
A man walks past an office of Portuguese bank Banco Espirito Santo (BES) in downtown Lisbon August 4, 2014. REUTERS/Hugo Correia

Image courtesy of Reuters
In this case the new ‘good’ bank was set up as Novo Banco – the old – Bank Espírito Santo retained the bad and illiquid loans and high risk assets – and Novo Banco started fresh with all the good liquid loans and low risk securities- assets.

This enables Banco Novo – a ‘good’ bank to continue business and again borrow in the markets – to on lend to customers – giving a degree of security to the lenders – the Bondholders. (1)


Image courtesy of Reuters.

Now – one would assume that everything’s settled regarding the assets and collaterals that were sectioned off to the good and bad bank.
This was not the case and now the Portuguese central bank has ordered the transfer of ‘some bonds’ at Novo Banco – the ‘good’ bank – to Banco Espirito Santo , the bad bank that remained after the restructuring and is due to be liquidated.
This effectively imposes losses on their holders – yes five Bondholders and €2 billion worth of losses overnight.
A waterfall event for the five Bondholders.

There’s nothing inherently wrong with “bailing in” bondholders who’ve lent to a failing institution – these Bondholders took the risk and the higher interest rate return.

In this case they were with the good bank and then transferred across.

It’s certainly preferable to the old solution of using taxpayers’ money to shore up failed banks, and it’s enshrined in the new EU legislation that came into force on January 1st this year.

The Central Bank of Portugal has transferred five bonds from a sound financial institution to an unsound financial institution – in the process generating €2 billion worth of losses for the Bondholders.

Wait which five Bondholders from the 52 Bondholders at Novo Banco?

Eeny Meeny Miny Moe – watch all your assets go.


Please note – the security documentation for these Bonds would have stated that all the debt was rated “pari passu” – all similar securities rank equally.

Who made these decisions?

I believe five Bondholders will be taking this matter through the Courts – the EU legislation will have to be tested – it has to be tested or Eeny Meeny Miny Moe and Dead Broke may be you.

The Government in Portugal has set a very dangerous precedent – they have transferred legitimate Bonds from a ‘good’ bank to a ‘bad’ bank without justification to explain to the individual Bondholders as to the reason why.

And if they Bondholders win?

Mark Gilbert’s article on this practice “Portugal’s Bank Bail-In Sets a Dangerous Precedent” can be read here. (1)

The last paragraph from the Bloomberg’s article by Mark Gilbert (2) is quite apt:

Portugal isn’t the only country refurbishing its banking industry. Germany’s savings banks will need to bolster their capital in the coming months under the new EU rules; and the fourfold increase in bad loans held by Italy’s banks since 2008 means the central bank there has some housecleaning of its own to do. Consolidation — in the form of forced intermingling of stronger and weaker banks – it is likely in both countries. Investors who own debt issued by German or Italian banks will no doubt reflect carefully on what just happened in Portugal.



Original Guardian report:-


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