In Shocking Development, ECB Demands Impairment For Senior Spanish Bondholders; Eurocrats Resist

Tyler Durden's picture

In a landmark shift in its bank "impairment" stance, the WSJ reports that "in a sharp turnaround" the ECB has advocated the imposition of losses on senior bondholders at the most "damaged" Spanish savings banks, "though finance ministers have for now rejected the approach, according to people familiar with discussions." The WSJ continues: "The ECB's new position was made clear by its president, Mario Draghi, to a meeting of euro-zone finance ministers discussing a euro-zone rescue for Spain's struggling local lenders in Brussels the evening of July 9. It marks a contrast from the position the central bank adopted during the 2010 bailout of Irish banks--which, like Spain's, were victims of a property meltdown--when it prevailed in its insistence that senior bondholders in bailed-out banks shouldn't suffer losses." Needless to say, if indeed the fulcrum impairment security is no longer the Sub debt, but Senior debt, as the ECB suggests, it is only a matter of time before wholesale European bank liquidations commence as the ECB would only encourage this shift if it knew the level of asset impairment is far too great to be papered over by mere pooling of liabilities (think shared deposits, the creation of TBTF banks, and all those other gimmicks tried in 2010 when as a result of Caja failure we got such sterling example of financial viability as Bankia, which lasted all of 18 months). It also means the European crisis is likely about to take a big turn for the worse as suddenly bank failures become all too real. Why? Senior debt impairment means deposits are now at full risk of loss as even the main European bank admits there is no way banks will have enough assets to grow into their balance sheet.

Obviously, the ECB's 'revolutionary' suggestion will be met by harsh criticism at the FinMin level across Europe because if taken seriously it would mean the threat of wholesale bank runs. Sure enough, as the WSJ reports:

The ministers rejected the advice out of concern that financial markets would react badly to the decision. A draft of the rescue agreement, which will provide as much as EUR100 billion ($122.5 billion) for the Spanish banking system, requires Madrid to force losses only on shareholders and junior bondholders in banks receiving bailout money, and doesn't mention creditors higher up in the pecking order.


A spokesman for the European Commission, the EU's executive arm, said: "It is clear that senior bondholders won't be involved in burden sharing."


The ministers' decision confirmed a pattern in the euro zone for dealing with bank troubles, in which senior bondholders have been spared even in the most brutal failures. But the ECB's shift may also be a sign that the tides are turning on the issue, as the euro zone embarks on a fundamental overhaul of the way bank failures are dealt with within the currency union.


During the July 9 meeting, Mr. Draghi argued in favor of including senior bank creditors in burden sharing between taxpayers and investors in the case of Spain, three people familiar with the discussions said. Two said Mr. Draghi favored forcing losses on senior bondholders only when a bank was pushed into liquidation.

Of course, if Senior bondholders are impaired, even in one-off instances, revisionism, primarily out of Ireland will hit a fever pitch, where everyone will demand an answer why Ireland had to bailout Senior debt holders, while Spain, and soon Italy, will get away with bank impairment.

But a chief reason ministers decided not to make more privileged bondholders take losses was the Irish precedent, two people said. Dublin has had to pump more than EUR60 billion, equivalent to around 40% of its annual gross domestic product, into several struggling lenders, forcing it to request a EUR67.5 billion bailout from other European countries and the International Monetary Fund in 2010.


Forcing senior creditors to take losses in Spain would raise more questions in Ireland about why taxpayers were forced by the EU to take on the huge burden of repaying high-ranked bondholders.

So while Europe vacillates, there is still not definitive method to restructure failed and failing banks:

"We have general company law [on bankruptcy cases], but we have so far no bank-specific law," said Karel Lannoo, chief executive of the Brussels-based Centre for European Policy Studies.


The EU is now trying to rectify this situation and in June proposed a new legal framework for dealing with failing banks, which is cited in the Spanish bailout accord as a model. Crucially, the new rules would force national authorities to force losses on--or "bail in"--all creditors, for instance by converting debt into shares, when a bank has to be recapitalized by its governments.

Yet the question of why the ECB would even propose this revolutionary shift to all out impairment remains: after all, as anyone who had done even one Chapter 11 corporate case knows, at the end a company's assets must be just greater than its liabilities for fresh start restructuring: something that the banking sector has not seen once since the Lehman collapse.

And while such a return to reality would mean the potential to actually fix the situation, it would also mean the possibility of not only continent-wide bank runs, but all out balance sheet impairments courtesy of daisy-chained balance sheets, where one bank's liabilities are rehypothecated as another banks' assets in a virtually infinite loop, and where even the tiniest impairment causes the house of cards to fall.

Draghi is well aware of this, and the only reason he could bring it up is if he knows that absent full loss recognition, initially at selected venues, but gradually everywhere, there is simply not enough cash-good assets for the European financial system to "grow into its balance sheet."

The only question is how long until depositors, whose €10 trillion in cash makes the backbone of European bank liabilities, also figure out that their cash is backed by worthless assets, and then how long until they decided to, well, simply withdraw it...

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Joe Sixpack's picture

Hasta la Vista, baby!

AbelCatalyst's picture

Not that complicated. People/countries make decisions. There are consequences (good or bad). One learns from those decisions and grows as a result. The weak minded try to avoid bad consequences and those with integrity take the hit right away and moves on a better person. The consequences always show up in some way and the avoidance only makes things worse.

These are not difficult concepts - even my 10 year old grasps them. This is like watching a slow motion train wreck and the sad thing is the most ignorant amount us are making decisions that will likely impact all of us in some way - even the ones who made good decisions.

vast-dom's picture


THX 1178's picture

Not to the ZH community.

old naughty's picture

"...there is simply not enough cash-good assets for the European financial system to "grow into its balance sheet."

Don't we muppets know already, that they had never any intention of paying us pensions, for the rest of our "mis-er-able" lives.

Boomers? Cryers !!!

1000pips's picture

Now is the time to go long EURO/ this: The Euro is stronger than the usd.

Buck Johnson's picture

And this is the monster that has been swimming under the dark waters of the ocean but yet nobody knows where it is or what it is.  They just see waves and hear splashes nothing more.  This black swan is one that couldn't be avoided.  Draghi is doing this because the party is essentially over.  Ask yourself he knows what he said and what he did, by him doing what he did he essentially is saying to the others that it's over, time to take their medicine.

imbrbing's picture

" The weak minded try to avoid bad consequences and those with integrity take the hit right away and moves on a better person."

Sounds like what liars do, building lies upon lies, only in the end to find out if they fessed up in the beginning they wouldn't be in a much larger hole.

They are all just a bunch of psychopathic liars....

imbrbing's picture

somehow got doubleposted here, erasing.....

Michael's picture

Baby steps toward the black hole. Senior bond holders will eventually get whatever is left after going out of business bank liquidation and the aristocrat banking houses are no more.

No worries. New banks can be chartered when sound money is introduced. 

AC_Doctor's picture

ECB panic attack ensuing.  The walls are crumbling and the Pied Piper of Hamelin has lost his magic pipe as the rats engulf the EU...

El Oregonian's picture

The way the Euro is crumbling these days the Pied Piper is desperately looking for his new crack pipe. I'm sure they'll enjoy the temporary escape, at least for now, all the while bogarting the pipe and toking monster tokes to a new tune... Excuse me, USA here... do you think you can pass that our way?

ghostfaceinvestah's picture

You have to figure it is somehow related to Greece's inability to pay off the bonds the ECB holds.  You know they are nervous about the rest of the sovereign debt they are holding.  Someone has to take a hit so the ECB can get paid back.

PaperBear's picture

Tell me if I am wrong but the ECB holdings of Spanish government debt will never be impaired. If this is the case then they have a strange definition of burden sharing in that will be shared by some but not by others.

Hulk's picture

Time for you to leave, Grasshopper !!!

fockewulf190's picture

More like the Pied Piper has been chopped due to austerity measures, and the rats are needed for protein for the rest of the poor unemployed slobs who still have to eat. Nothing to do but turn your magic flute into a crack pipe.

hedgeisforpussies's picture

bs. it wont happen. there is no way they will let depositors lose their money. wwIII will happen. its not just europeans who keep money in european safe heavens but em nations as well. much easier to print euros and suffer inflation than to impose haircuts on deposits.  

James_Cole's picture

Waiting for Draghi to say he was just kidding.

Or maybe he suddenly started feeling patriotic?

Fail2Deliver's picture

This is obviously bullish for the ES...obviously

butchee's picture

Do you have some red ones?  I hear they are a "safe" investment

sosoome's picture

Can't they just rehypothicate something?

constantine's picture

I think Draghi is about to be rehypothicated...

bank guy in Brussels's picture

As said above, « Draghi is well aware of this ... »

Game on in Europe. Mario Draghi is lighting the match to make things happen.

For one, bringing back the Italian lira as the best route for Italy ... as pointed out in the article by Ambrose Evans-Pritchard in the UK Telegraph on Friday, 'Two steps closer to growth, liberazione, and the Italian lira':



Joe Sixpack's picture

They were saying thast about the Drachma too. Has not happened yet.

TrillionDollarBoner's picture

Money in banks? My savings are already out of there and converted into hard and soft assets.

Now if everyone else could just do the same we will finally enter the debt-cleansing shitstorm in which the real recovery will be born.  

caimen garou's picture

thats the only way,PURGE the system! survival of the fittest banks and gov.

cossack55's picture

If you want banks and gubmints to survive, you, sir, are a major part of the problem.

TrillionDollarBoner's picture

Fool. Of course banks and governments will survive the shitstorm. If you want honest banks and sustainable government built on sound finances, you, sir, are the problem.

americanspirit's picture

It all comes down to who the senior holders of Spanish debt are and whether the ECB can afford to lighten the boat by throwing them overboard. My guess is that they hold the keys to the lockbox that holds the on-board food and water supplies so even if they can't row a lick it's gonna be women and children first - overboard that is.

lizzy36's picture

If this is true, then they are going to need a much bigger boat for the Spanish bank bailout. 

As usual in EZ that is the issue. Where is the $2-$3T going to come from.

Who is going to pay whom, with what?

Everybodys All American's picture

I would think the obvious outcome would be bank failures and not rescues. This should not come as a surprise because it is inevitable.

Sudden Debt's picture



Cult_of_Reason's picture

Remember S&P 500 ~70 points rally on "news" Merkel "caved in"?


Germany's Merkel: Spanish Government Guarantees Bank Aid (Germany's Merkel Rejects View She Caved In At EU Leaders Summit)

German Chancellor Angela Merkel Sunday dismissed criticism that she caved in on key positions at a recent summit of European Union leaders.

In an interview with Germany's ZDF television, Ms. Merkel said loans to refinance Spanish banks through the euro-zone bailout funds will be backed by Madrid. She added that although EU leader agreed that in future the bailout funds will be able to lend directly to banks rather than having to go through governments, no decision was made to relieve governments of the responsibility of guaranteeing such loans.

Problem Is's picture

"Remember S&P 500 ~70 points rally on "news" Merkel "caved in"?"

Any reference that contains both Frau ("Heir") M(U)rkel, and a cave... implying sexual activity...

Will immediately send the S&P to 666...

chrisd's picture

When you say "at the end a company's assets must be just greater than its liabilities for fresh start restructuring", would you assume all debt holders get written down until that is the case?

Saucy-Jack's picture

B to the A to the N to the K to the R to the U to the N time.

Ineverslice's picture

If this proves to be meaningful, it would definitely be worthy of making loads of popcorn (with butter), watching it unfold just before the Opening, that would be some black swan timing. 

Heroic Couplet's picture

The Wall Street Journal is owned by Rupert Murdoch, and he's had his dumb butt yanked to England on a criminal case of cell phone hacking. I'd get two or three other sources to confirm.

russwinter's picture

If these bank  bondholder impairments are for real (?) this will mark the light the end of the tunnel for Spain, and any of the other PIGGS who go this route.

The shrinkage and liquidation of many of these albatross banks will be a liberation and bullish. I would look to buy non-financial Spanish stocks like TEF. 

Everybodys All American's picture

you may want to wait ... The market will collapse if this is going to occur. Which I'll believe it when I see it.

pain_and_soros's picture

If Europeans take their deposits out of their Euro banks, where is it going to go? 

To a bank in Germany?  My reading suggests they have to be a resident of Germany to open a German bank account..(likely the same for any other perceived "safe haven" bank), so that won't work for most.

Stuff it in their mattress?  maybe, their money might not disappear there as it would in a failing bank, but if they have a lot of cash, doesn't sound that practical....

Buy hard assets like gold? I suspect a fair amount of excess cash may find its way there, especially if they believe the ECB will have to print to support ever-increasing deficit spending governments who may have to increase already unsustainable deficits to bail out their domestic banks...

What will happen to the banks?  Do bankrupt PIGS try to bailout their domestic banks & if so, how, if they can't print euros?

Will each government use some of the only collateral of real value they still have to support their failed banks, namely gold (at least the gold that hasn't been given to the ECB as their share to support ECB reserves)? 

Somehow, the way I see it, gold has to be part of any solution to recapitalizing the banks and individual countries in the EZ - it is the only national asset of value remaining (owned/held by national central banks) and will enforce the necessary financial discipline on both countries & their banks, since if they mismanage their banks or domestic finances again, they give up their gold...

I'm just not sure exactly how they get from here to there tho...

JohnKozac's picture

pain_and_soros, you may have read this Reuters article already:


Super-rich investors buy gold by ton


(Reuters) - The world's wealthiest people have responded to economic worries by buying gold by the bar -- and sometimes by the ton -- and by moving assets out of the financial system, bankers catering to the very rich said on Monday.

stocktivity's picture

I don't see your average mom and pop Spainish saver taking their money out of banks and converting it to gold and silver.

Yellowhoard's picture

I would imagine that there are quite a few US insurance companies that this will effect.

Does anyone know the insurance industry well enough to choose losers here?

Arnold Ziffel's picture

How 'bout those private mortgage investors---- "... like hedge funds and pension funds...."-- who about to get taken to the cleaners:


"...using the power of eminent domain, which lets the government seize private property for public use. In this case, they would condemn troubled mortgages so they could seize them from the investors who own them. Then the mortgages would be rewritten so the borrowers would have significantly lower monthly payments."


" But investors who stand to lose money on their mortgage investments have been quick to register their displeasure....The lenders are going to be livid."


"But Robert Hockett, a Cornell University law professor who serves as an unpaid adviser to Mortgage Resolution Partners, was unsympathetic. He likes how the plan forces the hand of uncooperative investors, who have sometimes stifled plans to reduce mortgage payments."


The new book, "Flip that Contract in 3 easy steps, 1-2-3!" will be hitting book shlves soon.


And that infomercial for the ten CD set on "How to Break Your Contract in 5 Easy Steps"


THE DORK OF CORK's picture

Glad we Irish took one for the team...........

Too late but refreshing.

Mentaliusanything's picture

"There is simply not enough cash-good assets for the European financial system to "grow into its balance sheet."

And that in a nutshell is the insurmountable problem! Printing what is missing (vaporised) only dimishes what remains. Dragi knows and all the banks know that they have not only Zero assets pledged, but the light of day would show what a complete waste these loans are compared with the whole(should I say HOLE).

When your Bankrupt faking it to you make it is not a good plan.

tony bonn's picture

if this policy were uniformly imposed on all banks - including the tbtf and central banks - recovery could commence.

monopoly's picture

"Shocking development"....."Landmark Shift"...