MADRID Jan 30 Spain may have to foot part of a compensation bill likely to stretch to hundreds of millions of euros from a mis-selling scandal embroiling the country's rescued banks that has seen elderly savers take to the streets in rage.
Thousands of ordinary Spaniards are facing losses on complex financial products such as preference shares and subordinated debt, which many claim were sold as safe savings products.
Under conditions set by Brussels, savers will see their investments partially wiped out and the rest swapped into bank shares so that lenders like state-owned Bankia can receive European aid.
That has created a problem for politicians in Spain, where demonstrations by pensioners, angry at losing their life savings, are becoming an almost daily occurrence.
Spain is not alone is facing a stinging mis-selling scandal. In Britain, banks have set aside 12 billion pounds ($19 billion) to compensate customers wrongly sold loan insurance policies - a bill which could reach 25 billion pounds.
UK banks have also been caught up in a scandal over complex swaps. The UK lenders had to face the costs alone, although banks such as Royal Bank of Scotland and Lloyds are part-owned by the government.
Spain may end up having to use public funds to help lenders like Bankia face up to compensation payments, two sources familiar with the process said.
Spain's government is trying to put nationalised lenders on a stable footing again after requesting 40 billion euros ($54 billion) in European rescue funds last year to help banks cope with losses from a 2008 property crash.
"The first impact will be taken by the bank and once the compensation has been paid, each bank's situation will be looked at and a decision will be made on whether it needs public support or not," said an Economy Ministry source.
Rescued banks are not allowed to use funds from Europe to compensate victims of mis-selling.
Hybrid instruments, like the preference shares, are halfway between a bond and a share. People who win arbitration cases against banks can get their original investments back, and would no longer have to keep the shares they were forced to swap into -- thus depleting banks' capital, the sources said.
A group of 30 elderly Bankia customers stormed into a bank branch in central Madrid on Tuesday, shouting "thieves, thieves" at staff of the bank which had to take 18 billion euros in European rescue funds and is a particular focus of public ire.
An arbitration process for claims against Bankia has yet to start, making it hard to pin down an estimate of what the bill could be. The bank has roughly 5 billion euros in preference shares and subordinated debt sold to customers, and only a portion of those will likely escape the enforced writedowns.
At nationalised Galicia-baesd peer NCG Banco, where the arbitration process has been running for 6 months, around 11 percent of its 1.8 billion euros in hybrid instruments has so far been repaid, to just over 11,600 claimants.
At fellow bailed-out lender Catalunya Banc, meanwhile, the compensation bill from preference share claims is unlikely to be much more than 100 million euros, out of the roughly 500 million euros worth of those securities, a banking source said.
About 5.5 billion euros worth of preference shares are held in total by Spanish bank customers, markets regulator CNMV said. It said it did not have data for subordinated debt holdings.
While Spain's nationalised lenders may be able to cope with compensation costs in the millions of euros, Bankia's bill will be the biggest as it sold more of the products than other lenders, and successful claims are only likely to rise as the government tries to quell public anger over how arbitrations are handled by easing the process.
Consumer groups have argued the criteria used by banks to chose cases for arbitration so far are too narrow. These include selecting cases where products were sold to minors or disabled people, or when key documentation was not given to clients.
That has put off some customers from trying arbitration, a route which bars clients from using other legal avenues.
"It's another swindle," said Raquel Millan, whose parents' bought 35,000 euros worth of preference shares in 2010 from savings bank Caja Madrid, which later became part of Bankia.
($1 = 0.7370 euros) (Reporting by Sarah White; Editing by Elaine Hardcastle)