Europe News

Spanish Savers Offered Haircut Then Money Back

Miles Johnson, Financial Times

The Spanish government is in talks with Brussels to allow tens of thousands of retail clients who bought risky savings products from now nationalized lenders to avoid losing their investments as part of Spain’s bank bailout.

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Samuel Aranda | Getty Images

In place of inflicting large losses on small savers who purchased savings products linked to preference shares in in the lenders known as cajas, the is negotiating a compromise where they will suffer an instant haircut, and then be repaid in full over time by their banks, people familiar with the talks said.

The decision to inflict losses on holders of high interest preference shares and subordinated debt in rescued savings banks has been highly controversial in Spain, with the terms of the country’s not distinguishing between professional and retail investors.

While the negotiations with the department of Joaquín Almunia, EU competition commissioner, are fluid, bankers in Spain are hoping that preference share holders will be forced to take an immediate haircut of between 50 and 70 percent on their original investment, and later be compensated with high interest payments over four to six years.

No final decision on the exact level of haircut or interest repayments is expected until September at the earliest, but officials and executives are confident that the basic structure of the settlement will be accepted by Brussels. A spokesman for Spain’s ministry of economy declined to comment.

About €30 billion of such products were sold to individual savers before the crisis by small Spanish banks, according to estimates by Barclays, while about 60 per cent of subordinated bank debt is held by retail clients, excluding Santander and BBVA .

Numerous legal cases have since been brought by Spanish banks clients who allege they were mis-sold risky products as secure deposits, while Luis de Guindos, finance minister, has previously said it was an error that preference shares were ever sold to retail investors.

Executives at Spain’s nationalized lenders are concerned that if a decision is made to inflict large losses on their clients, many will leave for rivals, damage the value of the bank, and make a future return to private ownership even more difficult.

“This is not an emotional argument but a financial one,” said one senior executive at a nationalized lender. “If European money is invested in the bank, they have an interest in preserving the value of that investment.”

Bankia, the largest nationalized lender, has about €3 billion of preference share-linked products outstanding distributed among about 80,000 clients. The products were sold by Caja Madrid before it was merged with other savings banks to create Bankia.

Similar products were sold by others of Spain’s three other fully nationalized former savings banks, principally Nova Caixa Galicia, which under its new management has officially apologized to its clients for the sale of the preference share savings products.

Bankia, the largest of the four nationalized lenders, has seen its share price rebound from the lows suffered following news of its €23.5 billion rescue, on expectations that it will soon receive €19 billion in European funds as part of the first €30 billion tranche of Spain’s bank bailout package.