International Investors Decry Portuguese Bank Bail-In

A bail-in provision, which places the onus on bondholders and other investors to write down their holdings in the event of winding up a troubled financial institution within the European Union, came into effect on January 1, 2016.

The provision, which is designed to reduce the onus on taxpayers to bail out troubled banks, is included within the Bank Recovery and Resolution Directive (BRRD), which was first implemented in the EU in January 2015.

This December, the leftist Portuguese government chose to punish international investors by transferring five senior bonds they held with a face value of €2 billion ($2.2 billion) from the “good bank,” Novo Banco, created after the collapse of Banco Espírito Santo in 2014, into a “bad bank,” where worthless assets are parked, thereby wiping out their value.

The move left domestic and retail bondholders largely unscathed, but international investors claim the transfer did not treat senior bondholders equally (pari passu), that the selection of which bonds to transfer was arbitrary, and that because Banco Novo was not being wound up but only seeking to strengthen its capital ratios, BRRD rules were already in effect when the transfer took place. Some investors are threatening litigation. Others say the debacle will push up the cost of many European banks’ funding in the future.