In New Euro Boss, a Hard-Line Future

This was not Greece, after all. And though the financial press had been chronicling SNS Reaal’s troubled real estate portfolio, the adviser in Athens chose to accentuate the positive: The Netherlands has a strong economy, with a government that had always stood behind the country’s too-big-too fail financial institutions. And SNS, one of biggest Dutch banks, was offering a mouthwatering return of 6 percent a year.

“It seemed safe,” Mr. Zannakis recalled. “What could go wrong?”

Plenty, as it turned out. On Feb. 1, the Dutch government seized SNS to keep it from collapsing under the weight of those problem real estate loans. And in a drastic action, unprecedented in the five-year-saga of euro zone bank bailouts, the Dutch finance minister decreed: Bondholders like Mr. Zannakis would be wiped out.

This would be no mere “haircut” of the sort in which bond investors would take a partial loss, as has mostly happened since 2010 when euro zone governments have bailed out banks in Ireland, Greece and Spain. In such instances, taxpayers have taken the main financial hit.

In this case, Mr. Zannakis would lose the entire €50,000, or $65,000, he invested in SNS bonds only two weeks earlier, as part of a class of junior bondholders who saw a total of €1.8 billion disappear into the Dutch government’s ledger.

Suddenly, the rules seem to have changed — with potentially unpredictable implications for Europe’s banks and their investors.

What makes all of this much more than a Dutch novelty is the new clout of the country’s finance minister, Jeroen Dijsselbloem. Mr. Dijsselbloem has just been voted head of the Eurogroup, the powerful club of 17 national finance ministers who effectively set financial policy for the euro currency union.

There is a new financial sheriff in the euro zone, in other words. And his disciplinarian bent could hold tremendous sway as the euro zone continues to work through a to-do list of bank bailouts, including ones now pending in Italy and Cyprus. The Dijsselbloem doctrine could mean that bondholders of failing Italian banks or — even more radically, bank depositors in Cyprus — may end up absorbing steep losses if euro zone members are called upon to prop up the institutions.

“The direction of travel is clear: bailing in as opposed to bailing out is going to be the new normal in the euro area,” said Mujtaba Rahman, a European analyst at Eurasia, a research group based in New York.

In a positive light, this new rigor could make banks and their investors less willing to make risky bets — to the betterment of European banking. The downside is that it could become even harder for euro zone banks to tap skittish bond investors for new money as banks struggle to recover from the twin shocks of the global financial crisis and the subsequent European debt debacle.

That potential drawback is why Mr. Dijsselbloem, in a letter to the Dutch Parliament explaining his punishment of the SNS junior bondholders, said he had not also imposed losses on investors holding senior debt, even though he acknowledged he was tempted to do so. Those who hold senior bonds stand in line ahead of junior bondholders to get repaid if a bank fails, which is why those securities are deemed less risky and carry a lower interest rate. Dutch banks in particular rely on senior bonds to finance their operations.

Mr. Dijsselbloem’s office declined an interview request. But some government debt experts agree with him that making more of a bank’s investors share the pain of a collapse is the prudent way to proceed in any future bank bailouts in the euro zone.

Article source: http://www.nytimes.com/2013/03/09/business/global/in-new-euro-boss-a-hard-line-future.html?partner=rss&emc=rss