European Central Bank willing to force senior bondholders to take losses in non-systematic banks
THE European Central Bank is willing to see senior bondholders take losses when banks that are not systemically important fail, but euro zone finance ministers oppose such a move, eurozone officials said.
ECB President Mario Draghi signalled a limited change in the central bank's stance in talks with ministers on a bailout plan for Spanish banks last Monday but they rejected the idea.
Former ECB chief Jean-Claude Trichet had strongly opposed the principle and Mr Draghi's position marks a shift in the bank's stance, which had been to avoid losses for senior bondholders in any bank for fear of undermining confidence in the euro area.
Since taking over from Trichet last November, Mr Draghi has taken a more pragmatic approach to tackling the 17-nation currency zone's worsening debt crisis.
"Draghi suggested at the meeting of euro zone finance ministers that such an option could be acceptable in the case of some banks, but the ministers would not have it," one euro zone official said.
The official noted this only applied to banks that were no longer viable and were not crucial from the point of view of the banking system -- in practice only the smallest banks.
When Ireland needed a bailout because of its banking sector in 2010, the ECB insisted no senior bank bondholders should suffer losses, against the wishes of the Dublin government, because of concern about the market reaction.
"In Ireland the ECB advice was to pay senior bondholders and Ireland is doing that even in the case of non-viable banks," the official said, adding that Dublin has long been pushing to change that line but has never won any support.
"Times were different then, right after the collapse of Lehman Brothers, and the ECB president was different too," the official said. "But, as I understand, in the end there will be no burning of senior bondholders in Spain either."
The Wall Street Journal said Draghi had advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks.
But officials questioned by Reuters said the ECB's position was more circumscribed.
"The ECB position is that senior bondholders can be squeezed only for a gone concern -- it is not exactly a revolution and it is common sense," a second euro zone official said.
Asked about the Wall Street Journal report, an ECB spokesman said it was national authorities that regulated bank resolution and decisions were up to national governments.
The spokesman would not confirm or deny Draghi's remarks at the finance ministers' meeting, but said: "The ECB provides advice whenever requested.
"The ECB's advice aims to ensure that the treatment of senior bondholders is in line with EU rules," he said, without elaborating on what the EU rules were.
The first euro zone official said there was a difference between a bank bankruptcy, which would be governed by bankruptcy law, and liquidating a bank that could not stand on its own in the longer run.
"We don't want any bank bankruptcies in Europe, because that would cause Armageddon, but resolving non-viable banks is a different issue," the official said.
The euro zone has earmarked up to €100bn to lend to the Spanish government so that it can recapitalise its banking sector, hit by a collapsed real estate market.
European Competition Commission Joaquin Almunia told Reuters last month that Spain may need to wind down one of the bailed-out savings banks, but did not say which one.
Spain's economy ministry later said Madrid had no intention to liquidate any bank and the government would stick to its plan to clean-up, recapitalise and privatise all the banks that are rescued.
However under EU state-aid rules, the European Commission may reject a request to rescue a bank if it considers the lender too costly to save - effectively forcing liquidation.