EU court expected to limit investor losses amid Italy bank talks

BRUSSELS (Reuters) - The top EU court is likely to say later this month that the European Commission cannot use state aid rules to impose losses on private investors in a bank bailout, a ruling that would strengthen Italy and other countries in talks with Brussels.

The case was brought to the European Court of Justice by disgruntled investors who saw their savings wiped out by a banking rescue in Slovenia in 2013.

EU rules, adopted after the 2007-08 global financial crisis, impose losses on private investors, the so-called bail-in, before banks can be rescued with taxpayers’ money. The objective is to reduce irresponsible risk-taking by lenders.

Italy is negotiating with the Commission a softer interpretation of the rules to allow public a contribution to the recapitalisation of its weakest banks, including Monte dei Paschi di Siena (BMPS) BMPS.MI, without imposing politically sensitive losses on private investors.

The EU top court’s July 19 ruling will be watched closely in Portugal where the government needs to recapitalise the country’s largest lender, state-owned Caixa Geral de Depositos.

A key piece of legislation governing bank rescues in Europe, the Bank Recovery and Resolution Directive (BRRD), has a clause allowing states in serious economic trouble to pump public money to lenders which are shown to have capital shortfalls by banking stress tests.

Thanks to this clause, states can avoid the strict bail-in requirements of the BRRD, which may force losses even on bank deposits above 100,000 euros.

The results of the latest European test will be announced on July 29, very likely showing shortfalls in BMPS and possibly other banks.

But EU countries remain bound by EU state aid rules which foresee “burden sharing” during bailouts, imposing losses on holders of subordinated debt and hybrid capital, categories that include thousands of Italian small savers.

The court will not directly address BRRD directive. Instead its ruling will focus on the limits of the anti-trust powers of the Commission in applying state aid rules during a bank rescue, and whether its provisions are binding on EU member states.

The advocate general of the Court in conclusions issued in February said the Commission has no binding powers on this issue, and losses on private investors are not a necessary precondition to grant public aid to banks.

The Court usually upholds the advocate general’s conclusions in 80 percent of the cases, a Court official said, citing court’s statistics on past cases.

“We have no comment on the Advocate general opinion, it is for the EU courts to issue their judgment in the coming weeks,” a Commission spokeswoman said on Friday.

Reporting by Francesco Guarascio; Editing by Dominic Evans