The pain in Spain

If German citizens are wary about the Spanish bank bail-out, we can only imagine how some Spanish are going to feel about it.

As Joseph wrote yesterday (via El Pais) the draft memorandum of understanding for the bail-out includes provision to force any bank seeking aid to compulsorily write-off their preferred shares and subordinated bonds.

Which, in the case of Spain, includes a lot of what you might call ordinary people, as the FT reports:

Spanish banks have €67bn of subordinated and hybrid debt outstanding, according to Bank of Spain, much of which was sold to retail investors as savings products.

“The difference between Spain and other European countries is that these instruments are held mainly by retail investors,” said Daragh Quinn, a banking analyst at Nomura. “People who bought them might not have known exactly what they were investing in”.

What’s interesting is that several of the reader comments at the end of that story (and no doubt we’ll see the same here) have argued that this is well and good: one wrote:

Governments should only “rescue” depositors in insured accounts. Any other type of bank bailout perpetuates the crisis and hobbles the process of creative destruction.

Untile we have the possibility of failure where will be no chance of long term success.

Now, we don’t know the vagaries of Spain’s system. But it sounds like at least some of these “savers” might have got a raw deal. From the same FT story:

Luis de Guindos, Spain’s finance minister, has admitted that investors should not have been sold the savings products and he had sought to minimise their potential losses under a eurozone rescue. “It was an error to sell the the preference shares, and we will have to look for solutions,” he said in May.

Because this kind of thing has already been an issue via with the likes of Banca Cívica.

So, how will these investors react? Yesterday’s El Pais story reporting details of the MoU has 2,338 comments at pixel time. Also at pixel time, Spanish prime minister Mariano Rajoy was due to address parliament to detail more austerity measures, while hundreds of Spanish coal miners protest subsidy cuts.

This is a country with unemployment at 24 per cent. And as financial pundits are becoming increasingly aware, social stability is important and political risk is, well, risk.

Update: We missed Delusional Economics’ post on this same theme — as he points out, this is on top of the continuing questions over how much of this bail-out is going to end up on the Spanish government’s risk, too.

Related links:
The bail-in Spain – FT Alphaville

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