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Slovenian Bail-in Tactics Questioned as CJEU Opinion Supports Retail Subordinated Debt-Holders Reports VZMD
Pan-Slovenian Shareholders' Association (VZMD) reports that the CJEU court opinion, Kotnik e.a., delivered on February 18, 2016, supports approximately 2000 retail credit holders of Slovenian banks expropriated during the 2013 banking crisis and bail-in.
Advocate General Wahl's opinion states EU banking communications are not legally binding on member states. Furthermore, there is no duty to impose a compulsory write-down of subordinated debt, nor is disproportionate burden-sharing a precondition for winning EU approval of state aid measures.
EU court opinion provides general support to expropriated subordinated debt-holders, including retail investors and subordinated certificates-of-deposit holders, whose bank investments went up in smoke in the particularly harsh Slovenian bail-in of 2013. The Court of Justice of the European Union (CJEU) Advocate General's opinion Kotnik and Others (Kotnik) was delivered on February 18, 2016.
Advocate General Wahl's opinion questions the validity of the Slovenian government's actions concluding:
European Union (EU) communications are not legally binding on member states. If an EU communication is incompatible with a country's national legislation or constitution, no duty is imposed on the country to change its laws.
The EU, even in the context of the Banking Communication of 1 August 2013 (Banking Communication), lacks the authority to require a member state to impose "burden-sharing" on debt-holders in the form of a compulsory write-down of their claims or a conversion into equity.
Kotnik serves to more clearly delineate the power of the EU with regard to its member states and the power of those states to institute bail-in measures. These determinations will come into play as EU members struggle to implement the Bank Recovery and Resolution Directive (BRRD) and fine-tune their bail-in tools.
President of the Pan-Slovenian Shareholders' Association (VZMD), Mr. Kristjan Verbic affirms, "We are pleased with the Advocate General's Opinion in Kotnik as it confirms that disproportionate 'burden-sharing' was not mandated by the EU."
VZMD, representing the rights of small, expropriated debt-holders, filed the underlying case, Kotnik e.a. at the Constitutional Court of Slovenia (Constitutional Court) on December 4, 2013. The Constitutional Court subsequently referred this case to the CJEU for guidance on the validity and interpretation of the Banking Communication. In the Slovenian bail-in, subordinated debt-holders of six banks, including all three systemic banks in the country, were totally wiped-out. Slovenia did not offer the subordinated debt-holders the option of a partial write-down or conversion of the debt to equity. In stark contrast with bail-ins in other European countries, debt-holders lost the entire amount of their investments and received zero compensation in return. The Slovenian government relied on the Banking Communication to justify its unprecedented expropriation of subordinated debt-holders, taking the position that the EU required it to impose disproportionate "burden-sharing" as a precondition to winning approval for state aid measures. The EU approved the government's application to dispense state aid from the Slovenian budget in the form of recapitalization of the banks the day after the bail-in, more than eleven months after the initial request. To obtain this approval, the government took questionable measures. The valuations that purportedly justified the bail-in remain strictly confidential to this day.
Slovenian Bail-in Tactics Questioned Following Support by the CJEU for Defrauded Subordinated Debt-Holders
In support of its Slovenian member, VZMD, Better Finance has closely followed the ongoing case of the bail-in of subordinated bondholders in five Slovenian banks (NLB, NKBM, Abanka, Probanka and Factor Banka) to refinance these struggling institutions. In February this year Better Finance issued a Press Release in support of VZMD’s legal battle to stop the scandalous wipe-out of Slovenian Bank Bonds that had been mis-sold to investors in the first place.
Now the European court of justice has issued a statement indicating that the arguments put forth in defense of this bail-in do not hold water, stating that EU Member States are not legally bound by EU banking communications, that there is no duty to impose a compulsory write-down of subordinated debt and that disproportionate burden-sharing is not a precondition for securing EU approval of state aid measures.
Slovenian Bail-In Highlights Perverse Facet of Banking Union
At the time of writing the Court of Justice of the European Union (CJEU) in Luxembourg is still examining the legitimacy of the 2013 decision by the Bank of Slovenia to expropriate all holders of subordinated bonds and shares in recapitalised Slovenian banks.
Although few refer to it as such, the wiping out of shareholders' capital and subordinated bonds as part of the central bank's recapitalisation of the three largest banks in the country amounts to what is now commonly known as a bail-in.
Bail-in rules for Eurozone banks are part and parcel of the Bank Recovery and Resolution Directive (BRRD) and are designed to stop taxpayers from having to foot the bill for saving banks from bankruptcy. Instead, bail-in rules will oblige private shareholders and depositors to automatically bear losses equivalent to 8% of the bank's liabilities before any public support can be made available to bail them out. However, and lest we forget, individual investors and depositors are also taxpayers.
Considering that the BRRD is due to come into force on the 1st of January 2016, the Slovenian case is getting surprisingly little attention in the international press, even though Slovenian bondholders are not giving up without a fight, first taking the case to the Constitutional Court of the Republic of Slovenia and then all the way to the CJEU.
The Constitutional Court of the Republic of Slovenia found that the expropriation of bondholders by the Bank of Slovenia entailed “a severe violation of existing entitlements thus contradicting the principles of legitimate expectations” and questioned “whether such drastic violation of private property is truly proportionate to the public benefit pursued by the measures”.
Slovenia’s Finance Minister has defended the measures by referring to the fact that under EU state aid rules public funds can only be redirected to recapitalise banks after existing shareholders and holders of subordinated debt participate in the restructuring. These bail-in amendments to the Slovenian banking act are now being challenged on multiple grounds by VZMD, the Pan Slovenian Shareholders' Association and member of Better Finance.
Since the BRRD is not due for transposition into national law until 2016, as stressed by VZMD and other representatives of expropriated bondholders, Slovenian authorities insist instead on the binding nature of theBanking Communication by the European Commission “on the application, from 1 August 2013, of State aid rules to support measures in favour of banks”. VZMD states that the ‘Banking Communication’ of the European Commission was suddenly deemed binding (only in Slovenia and only at that time) and conveniently interpreted as to justify the wholesale cancellation of all subordinated bonds in all recapitalised banks. The matter is now in the hands of the CJEU who will be investigating the claim by the Bank of Slovenia that the Banking Communication is binding and that the legal provisions in question are merely enacting these rules.
According to VZMD, authorities also resorted to a number of blatant falsehoods about the extent of the supposedly catastrophic predicament of Slovenian banks in December 2013 in order to defend the expropriation. To the same end, the dismal macroeconomic situation was also significantly exaggerated, even though, as early as 4 December 2013 and just a couple of weeks before the official statement announcing the expropriation, an official statement was published on Eurostat announcing that the quarterly GDP of Slovenia remained stable.
The European Commission’s DG Competition has not been spared of criticism either as evidence emerged of pressure by a minor EC official to implement a complete wipe-out of all subordinated bonds as the precondition for him to forward the case to his superiors and recommend state aid to be granted.
With the implementation of the BRRD looming on the horizon, the Slovenian case highlights the many issues remaining to be addressed on the path towards an effective banking union.
Banking resolutions that don’t respect the rights of individual investors and depositors carry significant social costs. Since the onset of the financial crisis, individual savers and investors have borne the brunt of these costs. Not only are they paying for bailouts in their capacity as taxpayers, they are also suffering losses due to financial repression and negative returns on bank savings.
Adding insult to injury, depositors will from now on be put on the front-line and "bailed-in” by having part of the debt they are owed written off in order to rescue the borrowing institution. This is unacceptable and needs to be addressed as a matter of priority in the further development of the Banking Union. At the very least, assurance should be given that the bail-in of depositors is a measure of last resort.
Above all the Banking Union should continue to tackle what can only be described as the “privatisation of profits and socialisation of losses” by reforming “bail-in” rules to ensure the parties responsible for bank failures are the first to pay for resolutions instead of depositors and savers.
It’s a perverse system that would see savers and depositors pay instead of the parties responsible for bank failures, such as bank executives and supervisors.
Belgium, Slovenia rebuked for not applying EU bank bail-in rules
The European Commission rebuked Belgium and Slovenia on Thursday for not having fully applied EU rules to reduce taxpayers' costs in rescuing failing banks, leading to a delay in the euro zone completing its banking union project.
EU states were required to apply the Bank Recovery and Resolution Directive by the end of 2014. Compliance by the 19 states of the euro zone, of which Belgium and Slovenia are members, is a precondition to starting talks on a backstop for the newly established euro zone bank fund, the Single Resolution Fund.
It is the second time that the EU Commission, which is in charge of monitoring the application of EU rules, has warned Belgium and Slovenia.
"If these countries fail to comply within two months, the Commission may decide to refer them to the Court of Justice of the EU," the EU executive said in a press release.
Without bail-in rules in place, Belgian and Slovenian taxpayers are likely to be more exposed to possible new banking crises. The delay in the application of the rules is also slowing down the completion of a banking union, an EU flagship project to increase lenders' financial stability.
One of the missing parts is a backstop to the Single Resolution Fund (SRF). EU finance ministers agreed to start a debate on this issue only after all euro zone states have applied bail-in rules.
The EU institutions and some member states are worried that in case of a broad banking crisis, the SRF may not be sufficient to rescue failing lenders unless it is quickly propped up.
The SRF will reach its target capacity of 55 billion euros ($62.45 billion) through a gradual transition until 2024. This year the fund is expected to reach a capacity of 10 billion euros.
In a document addressed to EU finance ministers in April, France and Italy have urged a debate on the SRF backstop, calling for the euro zone bailout fund, the European Stability Mechanism, to provide financial support to the SRF. The ESM has a lending capacity of 500 billion euros.
Germany remains opposed to such a move, fearing its financial resources may be disproportionately used to rescue banks in other euro zone countries.