EU court says bank rescues need not hit investors

The European Union’s top court ruled on Tuesday that junior creditors and investors need not necessarily suffer losses before a bank is rescued, a judgment that may work in Italy’s favour as it seeks to bail out its banks.

The ruling, which follows action by disgruntled investors whose savings were wiped out by a bank rescue in Slovenia, is crucial in understanding how new EU rules to impose such losses are rolled out across the region.

The so-called bail-in regime, adopted after the financial crash, forces losses on private investors before banks can be rescued by the state - in order to spare the taxpayer.

While the judges in Luxembourg made clear that imposing such losses was legally sound, they appeared not to require that this happen automatically.

This is important for Rome, which wants to rescue its banks while protecting investors, big and small, from any fallout.

The final say, however, will be with the EU's executive, the European Commission.

“The Member State, and the banks who are to be the recipients of the contemplated State aid, take the risk that there will be a decision by the Commission declaring that aid to be incompatible with the internal market,” the court said.

The Commission signalled that the ruling left it with plenty of scope to impose the onerous bail-in rules.

A spokeswoman said the court had “specifically confirmed that the Commission is justified in introducing burden-sharing principles as a key condition to approve the aid”.

Rome forced banks’ creditors to take losses as part of the rescue of four small lenders in November, a move that was followed by mass protests and the suicide of one saver.

On Tuesday, the court said that such burden-sharing was not a precondition for granting state aid to a troubled lender.

“The Court considers that a Member State is not compelled to impose on banks in distress, prior to the grant of any State aid, an obligation to convert subordinated debt into equity or to effect a write-down of the principal of that debt,” the court said in a statement.

Italian banks, which have been struggling for years, have come under increasing pressure lately, and the Rome government has hastened efforts to get European blessing for a state rescue.

The government wants to inject fresh funds but European Union rules require the imposition of losses on creditors - chiefly holders of subordinated debt - first.

Italy is now in talks with the European Commission to allow public support for its weakest lenders, including Monte dei Paschi di Siena.

The Commission is charged with ensuring that state aid does not distort competition.

Heavily indebted Italy wants to exempt investors, fearing that losses would undermine faith in the country’s economic management and trigger protests against the government ahead of a crucial referendum on constitutional reform later this year.

German finance minister Wolfgang Schäuble has warned against a discussion about support for Italian banks before the European Central Bank publishes stress test results on July 29th, although many investors want to see a solution before then.

The yield on Slovenia’s 10-year benchmark bond fell to a 16-month low of 0.826 per cent after the court ruling, on hopes that the state would not have to compensate bailed-in bondholders in state-owned banks.

Reuters