The 'relative' innocence of the depositors in Cyprus who saw their savings crushed by the hammer-blow of Germany's reality last week is, it seems, not the only hardship that the European people are suffering. In Spain, thanks to their FROB restructuring, shareholders and bondholders (including hundreds of thousands of unsophisticated 'retail' investors who were sold 'fail-safe' and 'high-return' investments) face losses (haircuts) from 96% (equity) to 36% (subordinated debt) and 61% (preference shares) following the 'bailout' of Spain's dodgiest cajas (or savings banks).
As The Economist notes [5], clients infamously included Alzheimer’s sufferers and at least one customer who signed by dipping a finger in ink; shareholders should know the risks but the vast number of Spaniards who bought preference shares and complex subordinated debt from their cajas often did not. For example, a Madrid court is investigating whether Bankia misled investors: many of the 350,000 retail customers who bought Bankia shares in its €3.1 billion flotation in 2011 have already seen their money go up in smoke.
Depositors were not impacted by the closings and restructurings, so Spain can argue that they are not Cyprus, but while these investor losses pave the way for bank recapitalizations; they confirm the old adage that there is no such thing as a free lunch (especially in the new normal ZIRP world in which we live).
Cypriot depositors are not the only ones suffering the aftermath of a banking bust. People who bought shares or subordinated debt in Spain’s dodgiest cajas, or savings banks, have either been all but wiped out or forced to take hefty losses. Many small Spanish investors are among them.
Four months after Spain requested a €40 billion ($51 billion) chunk of its banking bail-out funds from its euro-zone partners, on March 22nd it delivered the blow that hundreds of thousands of retail investors feared.
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Many of the 350,000 retail customers who bought Bankia shares in its €3.1 billion flotation in 2011 have already seen their money go up in smoke. Retail investors spent an average of €6,000 each buying stock at a price of €3.75. Within a year Bankia needed a €19 billion bail-out; within 18 months it had a negative value of more than €4 billion. The shares are now trading at around 15 cents, a 96% fall on the issue price. A Madrid court is investigating whether the then Bankia chairman, Rodrigo Rato, and his executive team misled investors. They protest their innocence.
Shareholders should know the risks but the hundreds of thousands of Spaniards who bought preference shares and complex subordinated debt from their cajas often did not. All they saw were fail-safe investments with high returns. Clients infamously included Alzheimer’s sufferers and at least one customer who signed by dipping a finger in ink.
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Haircuts range from 36% for Bankia’s subordinated perpetual bonds to 61% for preference shares in Catalunya Banc.
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It’s not Cyprus: the lower rungs of the capital structure are the ones being hit. Losses for investors unlock European money to recapitalise the banks. It still ain’t pretty.