Senior Wisdom In Spain

As Madrid and the euro zone get ready to pump as much as €100 billion into Spain’s struggling savings banks, one of the biggest questions is whether taxpayers yet again have to pick up the whole tab for saving failing lenders, The Wall Street Journal Brussels Beat blog reported. The answer to this question has come out in small slices over the past week, and it seems that the final word on the issue may still be out. Here is a little recap of what we have learned over the past week: A first taste of the euro zone’s plan for Spain emerged Tuesday night, when a draft of the rescue terms that Madrid has to sign up to was leaked. Apart from ceding control over much of its banking sector to European institutions, the so-called Memorandum of Understanding requires Spain to impose losses on shareholders and owners of subordinated debt in banks receiving government support. The idea behind this exercise, the famous burden sharing, is to have private investors absorb some of the impending losses on real-estate investment gone bad. Ireland took similar steps after it had to spend around 40% its gross domestic products on saving its own teetering banks. Burden sharing seems like a logical step: The markets should ensure that investors are recompensed for the risks they are taking, and they, rather than taxpayers, should therefore lose some money when things turns sour. In the case of Spain, however, many of those subordinated-debt holders are regular savers that were sold those securities by their local banks as reliable investments. Thousands of them will now see those savings wiped out unless they can convince Spanish judges that they shouldn’t have been sold these investments in the first place. What the memorandum is suspiciously silent about is the fate of senior bond holders, those investors high up in the pecking order that have so far always been repaid in full even in the euro zone’s most dramatic bank failures in recent years. “It is clear that senior bondholders won’t be involved in burden sharing,” a spokesman for the European Commission said the next day, adding that burning privileged creditors could hurt financial stability in the euro zone. But that wasn’t the end of the story. Read more. (Subscription required.)