The Dutch government’s decision to expropriate the subordinated bondholders of stricken lender SNS Reaal has reignited the debate around how to force losses on creditors to avoid taxpayer bail-outs. Bail-in just moved into the realm of reality — but caution is needed when it comes to implementation.
Jeroen Dijsselbloem, the Dutch finance minister, has told the government that he did consider confiscating SNS’s senior bonds, but decided against it because of the potential negative effect that could have had on other Dutch lenders such as ABN Amro, ING and Rabobank.
His ambition to make private sector investors, rather than taxpayers, pay for the failure of the bank they invested in is admirable. Nonetheless, his rationale for leaving senior bondholders untouched is probably fair.
Subordinated bondholders, on the other hand, should not be surprised that they have been wiped out. The Dutch government shaved around €957m off its bill for saving SNS by expropriating those investors, and that is exactly what it should have done.
Note to investors: subordinated debt is called that for a reason.
New age
The market was shocked by the speed and decisiveness of the Dutch government’s actions. Part of that shock comes from the realisation that, five years after Lehman Brother’s collapsed, banks can still be toppled by the mistakes of the past. But a lot of it stems from the realisation that governments are no longer willing to protect private investors with the an unlimited doling out of the public purse.
Investors need to wise up and adjust to this new environment. They need to accept that we now live in a world where people who invest in banks can lose their money if that bank fails — just like any other corporate entity — even if that bank is a systemically important institution.
Under the European Commission’s Crisis Management Directive (CMD), which set out the bail-in framework, bail-in will apply to subordinated debt from 2015 and senior debt from 2018. Of course that does not stop governments bailing in senior before then, but European politicians have suggested bringing the 2018 senior implementation forward to 2015.
Finding the balance
From the point of view of taxpayers, it is undeniably positive that this is being discussed, but the Dutch government’s treatment of SNS highlights the problem with bail-in. While it is undeniably necessary, it pits populist politics against a European banking sector that desperately needs investors’ support.
The SNS debacle has shocked investors into taking bail-in seriously. This is good.
Bringing forward bail-in’s implementation to 2015 could shock them into turning away from European banks, especially those in the periphery, at the worst possible time — especially given that the final payback date for the ECB’s three year LTRO falls at the start of 2015. It could reverse the recent rally in peripheral spreads and would risk locking such issuers out of the market.
The instincts of those pushing for senior to bear the pain more quickly are well-founded. But gradual implementation is the way forward, and policymakers must tread an extremely careful path.