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Portugal Imposes 2 Billion Euro Losses on "Good Bank" Bond Holders

Portugal has done the unthinkable, apparently: forced bond holders of one of their banks to take a hit. (Bloomberg)

Novo Banco was a bank created from the breakdown of Banco Espirito Santo, and was created after the bad assets were moved to a “bad bank”. The senior creditors and depositors lost nothing in the 4.9 billion Euro rescue.

Well, not until now. Depositors are still spared, but some bond holders holding upto Euro 2 billion of bonds would see their bonds moved to the “bad bank”, so that a hole in Novo Banco’s capital could be plugged.

These bondholders are different from other bondholders, and the reason they’ve been targeted is: the bonds were issued under Portuguese law, which many of the other bonds were issued under international law. The latter will be sued elsewhere, and the former cannot easily be sued.

This has a problem – had all bond holders been told to take a small hit, everyone would lose a little, but the 2 billion euro hole would be filled. Now, only a few bondholders had to take the full brunt – the bonds fell from 92 cents to 7 cents overnight!

Needless to say, bond holders will sue, regardless. This might however set a precedent – can banks be told to let bond holders go to hell, while depositors remain fully covered? How do bond holders become ‘senior’ if some of them can see big losses?

Portugal has also apparently changed governments recently, and the new govt has reneged on the sale of the national airline. (FT) This government changing and not honouring old contracts isn’t only an Indian thing.

Europe’s almost like a volcano looking to erupt. The situation gets more tenuous each time there is such a confrontation, and there are more lined up!