A July 19 ruling by the Court of Justice of the European Union (CJEU) was expected to clear up questions about the legality of Slovenia’s December 2013 bank bail-in and specifically the decision to wipe out holders of subordinated bonds. But with both the Slovenian authorities and representatives of junior debt and shareholders claiming the verdict vindicated their positions, the situation remains as confused as ever. More clarity is not expected until a separate ruling from the Slovenian constitutional court, due in December.

In its ruling, the court said that the bail-in, which resulted in around €600mn of losses for subordinated bond holders and small shareholders, was legal. However, it also said that a European Commission banking communication, cited by the Slovenian authorities in their decision to wipe out junior debt, was not binding. In addition, while backing the principle of burden sharing by subordinated debt holders, it said the burden should be shared only to the extent necessary - a statement that left room for interpretation.

Slovenia’s central bank said in a statement that the verdict “supports the positions taken by the Bank of Slovenia” and “confirmed the validity of the so-called banking communication”, while the finance ministry said it confirmed the bail-in was in line with EU law. The ministry did, however, add that the ruling did not constitute a final decision on the constitutionality of the banking act, which was up to the Slovenian constitutional court to decide.

Meanwhile, the All-Slovenian Association of Small Shareholders (VZMD), claimed victory, saying in a statement emailed to bne IntelliNews that the court had ruled in favour of investors expropriated during the nationalisation of six Slovenian banks in 2013. Pointing to the court’s ruling that the European Commission’s Banking Communication was not binding, the association stressed that the expropriations were “neither necessary nor unavoidable for the restructuring of the banking system and allocation of state aid”.

“Each party in this case ... tries to interpret the ECJ Judgement as favourable for its interests. Unfortunately, the truth always lies in between the statements of the both sides,” Tamara Kek, a Ljubljana-based lawyer representing VZMD, told bne IntelliNews.

She noted that the court ruled in favour of the government concerning the protection of the right of property and the principle of protection of legitimate expectations of shareholders and holders of subordinated rights, but that “on the other side the judgment clearly pointed out that the communication from the Commission ... is not binding on the member states. This part of the judgment is surely in favour of the investors... The other important message of the judgment is that there is room for exceptional circumstances, which the government obviously did not respect...”

The Slovenian authorities stepped in to recapitalise six major banks and injected around €3bn into the sector in December 2013, averting an international bailout. The country’s two largest banks - Nova Ljubljanska Banka (NLB) and Nova Kreditna Banka Maribor (NKBM) - were among those taken under state control, along with four smaller banks.

Ever since the bail-in, the VZMD has been contesting the wiping out of subordinated debt holders of the banks. The association previously pointed out that, “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 case referred to the CJEU, Kotnik and others, concerned around 2,000 retail credit holders of Slovenian banks, who lost their investments during the bail-in. It was originally filed by the VZMD with the Slovenian constitutional court but was later referred to the CJEU.

However, it will now be down to the Slovenian constitutional court to rule on whether Ljubljana will have to repay bondholders, with a ruling expected in December.

The VZMD said in its statement that it had “high hopes” of the constitutional court’s ruling, and at a press conference on July 20 the association also proposed that Slovenia should adopt legislation requiring junior debt holders to be repaid with dividends and interest from bonds and shares issued by Slovenia’s bad bank, the Bank Asset Management Company (BAMC). “This way the state budget would not be burdened directly,” VZMD president Kristjan Verbic told journalists.

No taxpayer bailouts

However, the immediate financial impact of the ECJ ruling was to drag down yields on Slovenian debt, on expectations that the government will not have to pay out for the junior debt. The yield on Slovenia’s 10-year benchmark bond fell to a 16-month low on July 1 after the CJEU decision, Reuters reported.

There are also wider implications within the EU, in particular Italy where banks including UniCredit and Banca Monte del Pasche were trading down following the announcement. The verdict “will make it harder for Italy to negotiate support for its banks without imposing some losses on bondholders,” Andrew Edwards, CEO of ETX Capital, wrote in a July 19 analyst note.

“I’d say there are implications [in other EU countries] as [the ruling] sets the Commission’s position in stone - no taxpayer bailouts for any ailing bank. If taxpayers cannot be put on the hook then teetering banks will be left to fail or bondholders will endure huge losses as institutions reprice everything,” Neil Wilson, markets analyst at ETX Capital, told bne IntelliNews by email. “Italy is the worst affected but this is a sector-wide problem in Europe.” Wilson added that “stress tests due out on July 29 should tell us a lot more”.

Kek is also highly criticial of the “huge powers” conferred to the European Commission by the ruling. In addition, she points out that, “The judgment seems to go in the direction that the court is willing to overlook the human rights of ordinary people, actually little investors who trusted in the state owned banks, in order to protect the financial systems in EU.”

Meanwhile, earlier this month the Slovenian bail-in came under scrutiny from another angle, when the police carried out a raid on several Ljubljana business premises including the central bank and - according to VZMD - the country’s largest lender NLB, on July 6.

Slovenian police said in a statement that there were suspicions concerning a central bank assessment of one of the banks rescued, which financially benefitted the bank and allowed it to scrap its obligations towards subordinated bond holders.

The association had previously filed a criminal complaint against the governor and vice governors of the central bank, as well as notification of a suspicion of a criminal act by NLB and its management board. It claimed in a statement that, “on September 30, 2013, NLB’s balance sheet officially indicated a positive capital in the amount of €835mn, but the Bank of Slovenia established negative equity in the amount of (minus) €318mn on the same day and on this basis cancelled all NLB’s shares and subordinated bonds.”

While the current Slovenian government was not in power at the time of the bail-in, the timing is still unfortunate for Ljubljana, which is hoping to privatise NLB this year. The central bank has already admitted the bank will be “challenging” to offload, and Finance Minister Dusan Mramor’s decision to step down in early July - citing “exclusively personal reasons” - creates a lack of leadership at a critical time.