Creditors Accuse Portugal Of "Unfair, Populist Short-Cut" In €2 Billion Bank Bail-In
Two weeks ago, The Bank of Portugal shocked markets by bailing in senior Novo Banco bondholders.
Novo Banco was the “good” bank forged from the ashes of Banco Espirito Santo which had to be bailed out by the state in August of 2014. The idea was to sell Novo Banco to pay for the cost of the bailout, but the auction process eventually floundered amid turmoil in Chinese markets (at least two of the potential bidders were Chinese) and uncertainty about whether this “good” bank would in fact need more capital given the elevated level of NPLs already on its books.
In November, the ECB told Novo it woudl indeed need to raise some €1.4 billion in fresh capital which the bank initially said would come from asset sales. A little over a month later, Portugal’s central bank essentially just gave up. On December 29, the bank announced it was transferring €2 billion in NB senior notes back to Banco Espirito Santo which, like a ghost skyscraper in China, is set for demolition.
In other words, Novo Banco plugged the €1.4 billion hole by essentially declaring €2 billion in bonds null and void.
There were five issues affected but you can get a pretty good idea about what happened next by having a look at how the 2017s traded that morning:
The reason this had to be done quickly was because if Portugal had waited until January, uninsured depositors would have been at risk under the EU's new bank resolution mechanism. Plus, Portugal is anxious to get the auction process started again to avoid the decidedly unappealing prospect of having to keep the cost of the bailout on Lisbon's books in perpetuity thus inflating the fiscal deficit by an extra 3% of GDP.
Now that the smoke has cleared, bondholders aren't happy and Lisbon is doing its best to distance itself from the central bank's decision even as it clearly paved the way for Novo's sale, which the government obviously benefits from. "The Portuguese government said it was against the central bank’s decision to impose losses on some Novo Banco SA bondholders, according to two people familiar with the situation," Bloomberg reports, noting that "Finance Secretary of State Ricardo Mourinho Felix told investors on Monday that the ministry had expressed concern to the central bank about the transfer of bonds to a bad bank, [but] didn’t interfere in the debt transfer because of central bank independence."
For their part, the ECB says it had nothing to do with the transfer either. "The decision by Banco de Portugal to bail in some senior bond holders in Novo Banco was taken exclusively by BdP under its national resolution powers," the central bank said, in a statement.
PIMCO, for one, isn't buying the idea that the government had no say in the matter and in an op-ed for FT, managing director and global head of financial research Philippe Bodereau likens Portugal to Venezuela and Argentina before calling the Novo Banco bail-in an "inconsistent, unfair and amateurish populist short-cut."
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From "Discrimination at Portuguese Bank Novo Banco Sets Dangerous Precedent" as originaly published in Financial Times
Just over a year since the European Central Bank took over as the regulator for Europe’s systemically important banks, we face a situation in Portugal that calls into question the rule of law in that country and in the EU. This also raises very serious questions over how the ECB intends to act as Europe’s banking regulator.
Where banks are judged to be insolvent, then it is right and proper that senior bondholders should be bailed in and take losses. But this must be done in a fair manner and, indeed, in accordance with the law. What is clear is that in the case of Novo Banco, the ECB itself has concluded that the bank was solvent and in no need of another resolution, leaving no legal and economic rationale behind the radical course of action undertaken by the Portuguese authorities. It is important to stress that there is no new resolution, bail-in or insolvency proceeding here
In the case of Novo Banco, this shortfall could easily have been covered with private sector solutions, be they asset sales, equity raising and/or partial debt equitisation. This playbook has worked efficiently in the recent and much more challenging recapitalisation of the Greek banking sector, which led to an aggressive, but fair, bail-in of senior creditors.
The new Portuguese administration is not the first government to resort to asset confiscation and populist expediency. Venezuela and Argentina also belong to this club. The important distinction is that Portugal is a eurozone member state, and its systemically important banks are regulated by the ECB.
Indeed, it is no secret that the southern periphery of the eurozone has a large number of weak banks with significant non-performing loans on their balance sheets. The Novo Banco action sets a worrying precedent that an arbitrary and unfair confiscation of investor assets is an acceptable remedy to the financial challenges experienced by these weak banks.
It is a great shame that five years after the beginning of the eurozone sovereign and banking crisis, the eurozone is still dealing with banking crises in a manner that is inconsistent, unfair and amateurish. We collectively — investors, bankers, regulators and governments — should aspire to much higher standards and avoid populist short-cuts that will inevitably result in protracted litigation.
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For those wondering who's on the hook here, below find the list of bondholders who had a very bad day on December 29.
(6 votes)
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"That's money in the bank" has a new meaning.
Pinto is latin for dot, yes?
GM bondholders?
New saying: "That's fractional reserve money in the highly leveraged bank."
Ironically, this zerohedge article is sponsored by...
Ally Bank
https://www.ally.com/about/history/
with allies like that, who needs enemies?
Lay down with dawgs and you might get fleeced...
Still better than a depositor "bail-in"...
But is this not exactly how bonds are supposed to work (risk/return) and how insolvent banks should be "bailed" to repay deposits?
What I learned from this article: Governments denying their own CB's actions. THAT sounds like a template for the future if I ever heard one. I predict we'll be seeing more of that finger pointing again sometime soon. "Wasn't me, man. I did my homework. I'd be turning it in right now but this damned dog right here ate it. Bad dog!"
Pinto is latin for dot, yes?
Mais ou menos
In this case, the latter
Don't know about latin but in Tex-Mex it usually refers to beans or one of the 50 worst cars ever built in the US.
Why am I playing straight guy for Boris? The devil made me do it.
Loaning Money to a debt-ridden, socialist, banana republic European nation. How could this not end up losing money? To be honest The creditors that lend money in Portugal are pretty much getting what they deserve.
Of course, most if it really a con game: Institutional lenders chase after high yield debt using OPM (other People's Money) and than collect huge fees/bonuses on record "paper" profits. Then the borrower eventually defaults leaving the sheeple sheared naked. The money managers cry crocodile tears and do a dog an pony show in the courts to deflect blame. Of course the lawyers gets what's left of the sheeple's money fighting a pointless legal battle. Lawyers are happy, the bankers are happy and the sheeple never revolt. I guess they simply don't care enough.
# 2 Reason Boris is not purchase commercial paper.
# 1 is Boris is not even begin understand commercial paper and is prefer shovel and pick axe for extraction of low depth urban proximity copper ore.
And that's the "GOOD" bank. The "bad" bank, well...... yeah, about that.....
Good AIDS v bad AIDs essentially
https://www.youtube.com/watch?v=kFNs2mOkKzc
Heh heh. Yeah, pretty much.
Chris Morris -legend.
Fuck all bank bondholders. If they're stupid enough to lend to these zombies, then they deserve to lose their money and follow the bank into bankruptcy.
I think if bonds get defaulted on their purchasers should serve 3 mos. prison time for being "risky decision makers". You are right. Buy bonds at your own risk.
I like the pictures where Blackrock get the most fucked.
Bondholders are the new "but I was promised!" crowd.
Happy New Year Blackrock and UBS !
No lube for you !
If in the daily market trade, maybe a person has insight such as hints of QE, etc., but for the overall picture.. I cant promite precious metals, because I simply dont know. Of course they will go up eventually, but they wont let "us" have it. food, water guns ammo etc is better. But what is more important" I got info several years ago. The U.S., Canada, and yes, even Mexico, will be the last to go...So watch what is going on in other countries...This is very important, pay attention...Watch what is happening in Europe mostly, because what is happening in Europe will happen here soon thereafter...Germany and the migration issue, bank bail ins etc...Just watch how they ae taking down other countries for their new world order, and expect the same here when they are ready..I dont know for how long, but they gotta keep the stocks above the 15 k level, and maybe even keep oil above the 29 level...If I did stocks, I would buy them when they close in on 15k, then get out soon thereafter...Same with oil when it closes in on 29 a barrel...For overall longer term, watch Europe. What they do to Europe is what they plan to do with the u.s., canada , mexico. with some changes because they grow and learn...sorry for the novel.
wait for the US's "inconsistent, unfair and amateurish populist short-cut."s !!!!!!!
The important thing to note here is who got sodomized. The true insiders would have either been tipped off so that they could sell ahead of time, or else the proposed "solution" would not have hurt them.
Since Allianz and Blackrock got boned, then we can consider them to be outsiders in this crony capitalist system. Therefore we can look around at their other investments and bet against them. Most of their investments probably have a certain amount of political exposure, and it was demonstrated today that their political connections are weak.
So, were any of these bonds "wrapped" (covered by CDS)? I wonder if the ISDA would declare this as a "credit event" and pay out?
The next most interesting thing would be to find out who carried the counter-party risk. The bad bank maybe?
If only Sharia Law had been introduced a month before :(
Hey PB & FT get used to it cry babies. It's efficient and creatively destructive... welcome back REAL CAPITALISM working for the people for a change!!
Trusting a politician to responsibly safeguard other people's wealth is trusting a dog to responsibly safeguard the bacon.
Yet, inexplicably, people do.
And even more inexplicably, they continue to trust even more bacon to the dog under the theory that if this dog was bad, that one will be better.
And in outright madness, time and again, they are surprised that the dog gobbles down their bacon and then begs for more!!!!
"A fool and his money are soon parted." - Thomas Tusser
"There's a sucker born every minute" - David Hannum
"Trusting a politician to responsibly safeguard other people's wealth is trusting a dog to responsibly safeguard the bacon.
Yet, inexplicably, people do. "
And without further adu, I give you the Social Security system of the USA.(and Medicare).
To my American brothers and sisters....
Its gone, its all gone. It isn't going to be gone in 2027, its already gone. Greenspan, the crook, et al have already admitted that the SS trust fund the treasury talks about is a book keeping entry. Johnson folded in the SS tax into general revenues in 1967....while you all were not looking. He had to pay for Vietnam somehow(you never wondered how you could deploy 500,000 troops overseas and fight a war for 8 years without getting a tax increase?). Ever wonder why the GAAP accounts show a 6.6T deficit while the Whitehouse reports a 1T deficit? Because the Government doesn't consider the money they stole from the SS fund to be a borrowing, its intergovernmental so it gets swept under the carpet. Using GAAP (you know, the system that every public and private company BY LAW has to use) the deficit is 6T+ because GAAP accounts for these funds. The Current GAAP accumulated deficit is NOT 19T folks, its in the 130T range. Getting motion sick yet?
So, SS, its gone, all of it.
Why? Because you trusted politicians with your retirement money.
You'll bitch, whine and cry but...
It was a lie, deep down inside you KNEW it was a lie....but it was such a sweet lie, you allowed yourselves to believe it. You can't get blood out of a stone. Its gone.
And you reward for this self deception ( of trusting politicians ) is that many, if not most of you, will end up under highway overpasses.
Squid
Why the complaints? Sahereholders lose first, then bondholders, then depositors.
This rubbish that bondholders should be spared is just that: Rubbish.
Love to see Blackrock, UBS and Allianz being fucked! Very nice indeed.