Don’t underestimate the European Commission

August 20, 2009

Will RBS and Lloyds have to follow Northern Rock and defer coupons on their hybrid debt? There’s a nagging fear that any bank that has needed large amounts of state-aid may have to make subordinated bondholders take some of the pain.

Fitch Ratings has just added to the debate with a slew of downgrades of RBS, Lloyds, and six other banks’ subordinated debt, citing an “increased risk of deferral.” The chief threat here is the European Commission, which is getting very keen on the concept of “burden-sharing”, a euphemism for crucifying bondholders.

“The capacity for the Commission to materially influence both the capital remuneration policy and the future shape of state-aided banks should not be under-estimated,” warns Fitch.


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The European Commission may force banks not to pay on their debt, but they will kill the golden goose if they do? Who will buy debt/preferreds of these banks in the future? The state governments will never be able to get out of their cash infusions, in RBS e.g., if the non-equity holders get clobbered.

Posted by Ric | Report as abusive

Unfortunately, the EU may get away with this, notice that the ordinary equities went up today. Bond and preference share holders are being turned into sacrificial lambs.

Had the British gov not converted their preference shares to ordinary, this would not happen.

This is a tragedy for people who bought these as safe income yielding investments.

Share in the pain? Fixed income investments that are down 50-60 percent? How much more pain does the EU want us to share?

Buying preference shares, I do not participate in these banks upside, but I am getting lots of downside. This will undermine confidence, take money out of the pocket of individuals on fixed income, and make EU economies worse.

Posted by Nik | Report as abusive

I just sold my Citi that I bought as shares of assorted Cap Trusts before the conversion offer. Although it created short term gains the profit was good even after the IRS takes their cut. Unfortunately, that strategy failed for preferred shares of European financials.

It doesn’t look like the European banks will follow suit in converting their preferred/pref trusts to common, so I guess that this will create “deferred income”.

This is particularly painful for ABN AMRO cap trust shares, for which there is no longer an identifiable associated bank.

What worries me now is how long the “deferred” payments will remain deferred! They could go a long ways to blunting the pain if they specify exactly how long the payments are deferred. At that point we will own something tradeable for more than a few cents on the dollar.

Posted by proal | Report as abusive