O Rosal, SPAIN Dressed in orange t-shirts and blowing horns, a group of factory workers, fishermen's wives and builders gather outside their savings bank in the small Spanish mountain village of O Rosal.
They have come to demand their money back, taping up posters that read: 'Tricked by the banks. Plundered by the government' in what has become a weekly protest.
"There are people on the edge of destitution. Their savings are all they have," says 60-year-old retired factory worker Argimiro Martinez, a customer of NovaGaliciaBank (NGB) since he was 7 years old and one of the protest organizers.
Martinez and his fellow demonstrators are among thousands of Spaniards who say they were conned by banks into exchanging their savings for preference shares: high-risk, complex financial instruments seized on by lenders in the financial crisis as a means of bringing in extra capital.
Many of the banks which issued these products swapped them for shares and bonds. The main state-owned banks such as NGB did not. NGB has apologized and some banks have offered compensation for the worst cases. But now the banks are negotiating with Europe for capital as part of an international bailout, the terms of which will include inflicting a loss on people who in many cases handed over their life-savings.
As the talks take place in Brussels, protests are gathering pace across Spain, both in the north-west region of Galicia - the seat of NGB bank - and in Madrid, where lender Bankia is based and where demonstrators have shown their anger outside the headquarters of Prime Minister Mariano Rajoy's People's Party.
Lawyers say these people were swindled, and forecast a flood of compensation claims worth hundreds of millions of euros.
"If I have been conned into buying a product I didn't want, it's a lack of responsibility on the part of the bank, the same as if I went into a branch and slipped and twisted my ankle because the floor was wet," said lawyer Ramon Ozores at Colon Abogados.
Spain has asked for up to 100 billion euros to fix its banking system, groaning under massive losses from a property crash and loan defaults.
NGB, at the centre of the mis-selling allegations in Galicia, is one of four banks alongside Bankia, CatalunyaCaixa and Banco de Valencia, which were rescued by the state and are first in line to get European Union funds.
Most Spanish banks sold preferential shares in the early months of Europe's debt crisis, to increase solvency ratios under stricter regulatory demands. They stepped up their marketing of these products from 2008, embarking on aggressive campaigns that often involved cold-calling customers.
Preferential shares are half-way between a share and a bond. They do not mature, are not protected by the state's deposit guarantee fund and stop paying out a coupon if the company falls into losses. In a 2006 Caixanova internal document seen by Reuters, management describe preferential shares as the 'financial lung' of the business, enabling the bank to shore up its capital and embark on an ambitious global expansion plan.
In the event of a bankruptcy, preferential shareholders are at the back of the queue, behind bondholders. Banks throughout Europe sold preferential shares. In Spain, banks pushed them as safe, fixed-term deposits from which customers could get their money out quickly.
In O Rosal, car factory worker Avelino Guisande's bank manager rang him at home in 2009 to ask him to drop by to discuss a savings plan for 40,000 euros of his severance pay.
Guisande, who has trouble reading having spent his youth looking after sheep on the mountains, says he signed the papers where he was asked, after being assured he would be able to get his money out with 48 hours notice.
"I didn't read anything, because to read those papers I'd have to take them home for a week. I read in my own way - a little and with difficulty," he says.
Guisande, now 60 and still jobless, has since discovered what he thought was a high interest savings account was in fact preference shares, and he cannot access the money.
Cashing in the preferential shares was dependent on a secondary market that collapsed last year, leaving 43,000 NGB clients unable to get to their savings during the worst recession in half a century.
Some 22.5 billion euros of preference shares were held by Spanish bank customers in May 2011. That has dropped to 5.5 billion euros since most listed banks swapped them for shares or bonds to comply with 2011 global regulation that preference shares no longer count as bank capital.
But state-rescued banks have not done any deals with their customers. The stock market regulator says it these customers that account for almost all the 5.5 billion euros in preference shares estimated to remain in circulation.
Lawyers and bankers expect Spanish savers will be asked by the EU to take a loss of 70 percent on their holdings, a total of around 3.85 billion euros.
The savers' feeling of betrayal is particularly keen because the banks involved have roots back to the mid-1800s and started out providing deposits and loans for villagers and local businesses. In many cases people were let down by community members: bank staff spoken to by Reuters say they believed in the products and sold preference shares to family and friends.
In Cangas, a fishing village in Galicia, an 80-year-old woman said she lost 6,000 euros of savings when she opened what she thought was a savings account in her local branch of NGB. She signed the contract with a thumbprint because she cannot read and was too ashamed of her illiteracy to give her name.
Some branches of NGB have switched employees since the protests started. In O Rosal, a security guard stands at the door.
NGB was formed in 2010 from the merger of Caixanova and Caixa Galicia, unlisted savings banks or 'cajas' which moved into backing debt-fuelled building projects during Spain's housing boom.
The state took over NGB in September 2011, injecting 2.5 billion euros of funds when it became clear it could not cope with losses from bad real estate investments. At that time four top directors left, awarding themselves multimillion-euro severance pay and pension packages that shocked Spaniards.
NGB's new management is trying to reclaim the directors' money. It has also apologized for the mis-selling of preferential shares and set up a compensation process for customers who believe they were conned.
The bank has received 30,000 claims and Price Waterhouse Coopers, which is running the scheme, has approved 7,000 of these so far, a bank spokesman said. NGB has returned 60 million euros to customers, but it does not know if it will be allowed to continue once a deal is struck with the European Commission.
CatalunyaCaixa recently set up a compensation process using Ernst and Young as the third party, a spokeswoman for the bank said, but has yet to pay out any money. Bankia says it is working with Spanish and European authorities to find the best solution for clients. Banco de Valencia says most of its preference shares were sold to institutional investors.
WAVE OF LAWSUITS
Both Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos bargained with Brussels to try and soften savers' losses, said one source with knowledge of the matter. Many of the affected belong to a frugal generation of Spaniards who put aside cash despite low salaries, and are more likely to vote, giving them political clout.
The matter has become a political hot potato as television images of protests outside banks heat up local elections in ruling Popular Party (PP) stronghold Galicia on October 21.
But Brussels has stood firm, maintaining these savers must accept harsh losses on their investments to avoid taxpayers elsewhere in Europe paying more.
Spain is negotiating with the European Commission the conditions and size of losses preferential shareholders must accept, a Bank of Spain source said. Banks' plans must be approved by November.
But if savers can prove they were swindled and were sold preference shares when they thought they were getting a fixed-term deposit, the bank must pay them back, under Spanish law.
Subordinated debt holders at state-owned banks must also take a hit as part of the European rescue.
NGB has around 900 million euros of subordinated debt in circulation, about the same amount as it has in preference shares, and Bankia has 1.9 billion euros of subordinated debt, compared to 3.1 billion euros of preference shares. Neither the Bank of Spain nor the stock market regulator could give a figure for how much subordinated debt is held by bank customers.
"These people thought they were getting something else, which means the contract they signed is null and void," said Ozores of Colon Abogados. "The bank must return the money."
Spain's state prosecutor, Eduardo Torres-Dulce, has given top priority to cases of mis-selling preference shares and met regional prosecutors in Madrid recently to compare notes. He suggested collective court action as the way forward.
However a class action lawsuit brought in Galicia by chief prosecutor Carlos Varela, proposing all NGB preference contracts be declared null, was rejected by the regional court, which said cases must be brought one by one.
Varela says this will push the legal system to the brink of collapse with tens of thousands of people turning to the courts to get their money back. He is appealing the judge's decision.
"If collective action does not work, the claimants are not going to sit with their arms crossed. They are going to lodge individual lawsuits," Varela told Reuters.
One person planning action is Estrella, a 44-year-old holder of Caja Madrid preference shares, who declined to give her surname. Caja Madrid was merged with six other savings banks in 2010 to form Bankia.
Estrella and her 82 year mother found out in February that their 99,000 euros life savings, put aside by her father over many decades driving a taxi in the morning and working at a cinema in the evenings, were tied up in preference shares.
Estrella says the bank told them the product was safe and they would have the money whenever they wanted. In June, her mother tried to kill herself, naming Bankia in the suicide note.
"She trusted in her savings to support her through her old age, and now, at 82 years old, she has discovered she has been conned," Estrella said.
($1 = 0.7754 euros)
(Editing by Sophie Walker)