MADRID Spaniards who swapped their savings for risky bank shares cannot draw on European funds to recoup money they lost, an EU official said, obliging them to pin their hopes for compensation on the government.
After Spain's housing bubble burst around five years ago, its heavily exposed lenders secured fresh capital in part by persuading thousands of mainly small-scale investors to exchange their savings for high-risk preference shares.
Under the terms of a 100 billion euro credit line that the European Union granted Spain in June for its banking sector, those investors will incur losses.
The EU's competition commissioner Joaquin Almunia said on Monday they could not be compensated via EU rescue funds.
"If it is necessary to compensate (shareholders) it can only be done with money from Spain," Almunia - himself a Spaniard - told reporters at a breakfast in Madrid.
Thousands have joined protest groups saying they were pushed by the banks into exchanging what in some cases were their life savings.
Lawyers representing them say they were swindled, and forecast a flood of compensation claims worth hundreds of millions of euros.
The government has not ruled out offering compensation.
The property collapse has saddled Spain's banks with 184 billion euros of toxic real estate assets, according to Bank of Spain estimates.
An independent audit of the Spanish banking sector in September identified seven out of 14 banks as needing a capital injection in the event of a severe economic downturn. The results of the Oliver Wyman stress test found the banks needed around 60 billion euros ($76.8 billion) of extra capital.
The government expects to tap only around 40 billion euros of the European credit line because banks' bondholders will take a valuation loss - or 'haircut' - on their investments.
Some lenders will also transfer part of their portfolios to a bad bank being set up to park soured property assets, and others hope to raise money themselves.
Among the lenders that failed the stress test, four have already been nationalized: Bankia (BKIA.MC), Catalunya Caixa, NovaGalicia Bank and Banco de Valencia BVA.MC.
Many of the banks that issued the preference shares swapped them for shares and bonds. The main state-owned banks such as NGB did not.
These banks are already in talks with Brussels and will be the first in line to receive funds in November.
Almunia said on Monday that the European authorities would rule on November 28 on proposals submitted by the banks themselves to restructure and downsize. (Reporting By Robert Hetz; additional reporting by Sonya Dowsett, writing by Sarah Morris and Jesus Aguado, editing by Clare Kane, John Stonestreet)