EU court to rule on haircut for investors in Slovenian banks

EU court to rule on haircut for investors in Slovenian banks
Nova Ljubljanska Banka (NLB) was among the six banks taken under state control.
By Clare Nuttall in Bucharest July 18, 2016

An EU court is expected to rule on July 19 in a case related to the 2013 bail-in of six Slovenian banks. Thousands of small shareholders lost their investments when subordinated bonds and shareholders’ capital in the banks was erased.

The verdict comes at a time when the Slovenian government is already under pressure after a July 6 police raid at the central bank and other offices in Ljubljana connected to the bail-in. Finance Minister Dusan Mramor stepped down a week later, further undermining Prime Minister Miro Cerar’s government.

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.

Thanks to the drastic haircuts imposed, junior debt-holders lost their entire investments, unlike in bank bailouts in other European countries. The Slovenian government has defended its move, saying it was based on an EU Banking Communication, but this has been challenged by the Pan-Slovenian Shareholders’ Association (VZMD), which has been fighting to restore the rights of shareholders since 2013.

“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,” says a VZMD statement. “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 being considered by the EU Court of Justice (CJEU), Kotnik and others, involves 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 later referred to the CJEU.

The association’s president Kristjan Verbič confirmed to bne IntelliNews that a verdict is expected on the morning of July 19.

A ruling in favour of the shareholders seems likely after advocate general Nils Wahl favoured the VZMD’s case in a February opinion.

The Slovenian government cited an EU Banking Communication to justify its move. However, according to Wahl’s opinion, such 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,” the VZMD said in a statement after the opinion was made public.

The Slovenian authorities have also come under pressure from the police, which launched a raid connected to the 2013 bail-in on July 6. At the time the 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 the holders of subordinated bonds and subordinated debt worth €257mn.

More than two years after the Slovenian bail-in, the Bank Recovery and Resolution Directive (BRRD) came into force in January 2016. The directive sets out rules for bail-ins in the eurozone. In June, the Slovenian parliament approved legislation on bank bail-ins in line with the directive. The country’s central bank previously set up a bank rescue fund, financed by commercial banks, to avoid spending taxpayers’ money to support banks in future crises.

However, the directive has been criticised by the European Federation of Investors and Financial Services Users, which warned shortly before it came into force that “banking resolutions that don’t respect the rights of individual investors and depositors carry significant social costs".

It also pointed out that, “the Slovenian case highlights the many issues remaining to be addressed on the path towards an effective banking union".

Should the July 19 verdict go in favour of the VZMD, it is likely to further undermine the government, even though Cerar was not in power at the time of the bail-in.

It is not clear to what extent the resignation of Mramor, who was also not in office at the time, is connected to the case. Mramor said on July 13 he was resigning for “exclusively personal reasons” and returning to academia. However, the timing of his resignation was suspicious, coming a week after the raid at the central bank and six days before the expected verdict in the Kotnik case.

Cerar has already appointed Development Minister Alenka Smerjkolj as a temporary replacement for Mramor, and sought to reassure Slovenians that his departure does not mean a policy change. However, the opposition New Slovenia Party has already called on the government to step down, claiming Mramor’s departure comes amid “huge conflict and tension within the coalition”.

In a July 13 note, Teneo Intelligence also points out the “growing difficulties” in Cerar’s government. “The chances that the coalition will last the full term until summer 2018 are diminishing and it is likely that the increasingly-strained cabinet will not be able to agree on outstanding reforms in two controversial policy areas: pensions and public administration,” Teneo analysts said.