LONDON, Aug 4 (IFR) - By leaving Banco Espirito Santo's
senior debt intact, the Portuguese authorities have missed out
on a golden opportunity to finally make a stand for Europe and
show that senior debt is not sacrosanct.
After the Portuguese lender unveiled a bigger-than-expected
EUR3.6bn loss last week, speculation was rife as to what plan
the central bank would come up with and who would get swept up
in a resolution.
But while senior prices dropped, they never collapsed, and
it turns out that senior debtholders were right to hold their
The central bank's decision to split BES into a good and a
bad bank and place the senior debt in the newly created Novo
Banco flies in the face of everything the global and European
authorities have been trying to achieve since the collapse of
Lehman Brothers in 2008.
The case for leaving senior in the bad bank is easy to make.
First, the rules that will enshrine bail-in of senior debt in
the European framework are a less than two years away from being
implemented, and in some cases just a few months away. The UK
and Germany are accelerating the timeline for implementation to
January 2015 instead of January 2016.
Regardless of this, European authorities have shown time and
time again that, when needed, they can pass emergency
legislation allowing them to haircut debtholders.
You only have to look back at the Netherlands and Cyprus for
the most recent examples when authorities were able make
something happen when they want to. And take a look at Austria
and the fact that the legislator is a few steps away from
retroactively removing government guarantees on subordinated
Second, bail-in has increasingly become less of a taboo.
Again, there are enough examples that show investors now accept
that this is the new world in which they live. Previous cases of
banks being shut out of the market because an event of bail-in
has occurred are no more: again, see what has happened in the
Netherlands and the fact that Dutch banks have been able to
raise sub debt post-SNS.
Third, while it was understandable during the height of the
sovereign crisis that authorities would be reluctant to haircut
bondholders for fear of contagion, it has been quite clear that
the market views BES's situation as idiosyncratic. The market is
solid enough that it can withstand these shocks and ECB
president Mario Draghi is still happy to do "whatever it takes".
The Portuguese authorities used pretty much every single
tool available under the EU bank resolution and recovery
directive: sale of business, a bridge bank and asset separation.
It seems incredible that they would stop short of the
bail-in tool. Keeping senior in the bad bank would have provided
much needed capital while the institution was being wound down
and shown that the EU authorities mean business when they say
they want to end too big to fail.
Instead, senior debtholders across the continent will be
rubbing their hands, secure in their belief that no one, for
now, is willing to be the first mover.
(Reporting by Helene Durand; Editing by Philip Wright, Luzette