EU bank bailout roulette awaits Monte dei Paschi investors


* Investor treatment in bank bailouts varies across Europe

* EU bail-in framework does not take effect until 2018

* Countries will still have large degree of discretion

* Monte dei Paschi investors wait to see how they will fare

By Laura Noonan

LONDON, Sept 29 (Reuters) - Investors awaiting the finerpoints of Monte dei Paschi's restructuring plan couldsoon find themselves wishing their bank had run aground atanother time and place in the eurozone financial crisis.

After approving more than 5 trillion euros of state aid toits financial system over the past five years, the EuropeanUnion has switched the burden of bank bailouts away fromtaxpayers and onto shareholders, bondholders and big depositors.

But a consistent approach and certainty over who pays when abank gets into trouble is still lacking, deterring much-neededinvestment into the region and its lenders and ensuring a steadystream of lawsuits when losses are imposed.

"We are trending in the direction of a proper priority ofclaim, a proper following of the hierarchy of the capitalstructure," said Aaron Elliott, a London-based credit analyst atCiti. "But we are certainly not there yet."

"It's very difficult for investors to get involved," headded, pointing to a reluctance to buy bank debt in somecountries.

European rules designed to ensure a harmonised approach tobank bail-ins, forged over the summer, do not take effect until2018, leaving bank investors in heavily indebted countries inlimbo, and weighing on those states' own cost of borrowing.

"The reality is, these individual countries can't wait for2018 to bail in bondholders, they just can't afford to do that,"said Elliott.

In response to public outrage over taxpayer-funded bailoutsand to reassure small depositors their funds were safe, theEuropean Commission, which sets conditions banks must fulfil toqualify for state aid, in July updated its framework for bankbailouts for the seventh time in the crisis.

Since the EU was notified of Monte dei Paschi's rescuebefore Aug. 1, 2013, it will be considered under the previousversion of the state aid guidelines.

In any case, the EU Competition Authority's powers as defacto guardian of bailout consistency are limited - theframework lays out broad guidelines for imposing losses onshareholders, bondholders and large depositors, but exceptionscan be made if the measures would do more harm than good.

"State aid control does not enable the Commission to'harmonise' measures that member states intend to implement, butmerely to set minimum standards for them to be compatible withthe internal market," the spokesman for the Commission'scompetition division said. "Inconsistencies ... are thus due tothe choices of member states."

Investors in Monte dei Paschi are still waiting to see howthey will be affected by a new restructuring plan to avertnationalisation. Italy's third-largest lender has delayedapproval of the plan because it is hoping the Commission willgive it more time to raise 2.5 billion euros, sources have toldReuters.


As the crisis has evolved in Europe, so also have thebailouts. At the beginning, taxpayers were the first to be hitto protect junior bondholders, senior bondholders and, mostsacrosanct of all, depositors.

Ireland nearly went bankrupt in 2010 trying to save itsbanks and protect senior bondholders and depositors from losses.

Three years later, Cyprus became the first eurozone countryto impose losses on large depositors, following a path beatenfar more quietly by Lithuania a month earlier, when losses wereimposed on large depositors of failed Ukio Bankas.

"There has been no consistency," said Duncan Martin, partnerat the Boston Consulting Group (BCG), whose firm has worked onthe Irish bank stress tests and Portugal's bank restructuringprogramme. "There has been a gradual harshening of treatment."

The Commission's competition spokesman said Brussels hadfollowed the same principles in its assessment of state aidthroughout the crisis but, as situations changed, so did therules.

"These changes are, however, not the result of aninconsistent assessment but of the Commission's attempt toreflect in its assessment and rules the changing circumstancesin the markets in which banks operate," he said.

An official involved in designing bank bailouts in countrieswith EU/IMF programmes said consistency improved over time butwas hard fought. "In an ideal world, we should have had a systemwith much more consistency," he said. "Sometimes we had to comeup with solutions very fast ... (and) there were differentliability structures and different assets."

As the number of programmes swelled, harmonising approachesbecame more challenging. "It would have meant all threeinstitutions going back to consult with their respective teams,"he said. "In practice it was extremely difficult."


Differences in bailouts depend on place as well as timing.

Ireland was able to create a bad bank, Nama, to absorb morethan 70 billion euros of bad loans because, when Nama wascreated in late 2009, Ireland still had a high enough creditrating to enable the financing of the bad bank to work.

Spain was in a similar situation when it created the badbank Sareb, while both countries also had a portfolio of souredcommercial real estate loans that suited being managed through anew agency.

"You need that set of features to make an asset managementcompany work," said Ajay Rawal, managing director of consultingfirm Alvarez & Marsal.

Many EU countries supported their banks with system-wideguarantee schemes, and guarantees were also extended to somebanks to improve their capital positions without pre-paidbailouts, like the 10 billion euro "risk shield" given toHamburg- and Kiel-based shipping lender HSH Nordbank.

In Italy, the government chose to support ailing banks bybuying newly-issued bonds, known as Tremonti bonds.

"It (the type of solution) obviously depends on how solventthe country is," said Martin. "If Germany wants to recap(recapitalise) they recap; if they want to guarantee, theyguarantee. There's no issue of the sovereign rating beingdowngraded and so on."

"In Cyprus, the cupboard was bare. They could not havebailed out the banks, even if they wanted to."

Rawal, whose firm advised the Central Bank of Cyprus on itsbanking sector's 2013 restructuring, said the health of the restof the banking sector also factors in the structures used tosolve problems, pointing to Spain's ability to get healthy bankslike Santander to invest in Sareb.

In the Netherlands, when the taxpayer had to give close to10 billion euros of fresh support to complete SNS's Februaryrescue, the government vowed to reclaim 1 billion euros of itwith a one-off bank tax in 2014. That makes less sense if mostof the sector is bailed out, as in Ireland, Greece and Cyprus.

Despite the many variations of bank rescues, the situationcould have been worse. "For all the inconsistencies that you hadin terms of how banks are bailed out, something that did bringsome coherence to the whole process was the intervention of theEuropean Commission," said Roberto Henriques, a credit analystat JP Morgan.

View Comments (0)