Shock Waves Spread from Spain’s New Banking Crisis

Has the time finally come to test the EU’s bail-in law?

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

The shares of Spain’s sixth biggest bank, Banco Popular, plunged 36% this week to €0.43, reducing the bank’s market capitalization to €1.7 billion. Just three weeks ago, when there was still a glimmer of hope that things could be turned around, it was worth almost double that. Its shares traded at €15 ten years ago, before the collapse of Spain’s mind-boggling housing bubble that left Popular holding billions of euros of real estate assets.

Popular may not be a systemically important institution, but it’s nonetheless an institution of great import. It has the largest portfolio of small business customers in Spain and enjoys the patronage of one of Spain’s most influential institutions, Opus Dei. Its well-heeled members are among the bank’s most important shareholders and investors, and they stand to lose a lot of money if a last-minute buyer is not found soon.

This is an outcome that can no longer be discounted, especially after reports emerged on Thursday that senior officials of the ECB’s regulatory arm, the Single Supervisory Mechanism, had warned the bank could be wound down if it fails to find a buyer. But the EU agency charged with overseeing bank failures later issued a statement saying it “never issues warnings about banks.”

But the damage has already been done. And it’s not just Opus Dei, or Popular’s thousands of long-suffering retail investors, that could end up paying a heavy price. Popular’s investors also include PIMCO, one of the world’s largest asset managers, which owned €279 million of Popular’s outstanding €1.25 billion of face value in AT1 bonds at the end of March, making it by far the largest holder at the time.

These AT1 bonds go by another more familiar name: contingent convertible bonds, or Co-Co bonds. These are financial instruments that pay high coupons, because they come with a high risk, designed as they are to absorb losses at times of distress, by converting to equity or being written down when the lender’s capital ratio falls below a certain point.

Popular’s second batch of Co-Cos, worth €750 million, dropped to 59 cents on the euro, the lowest point ever reached by a bank Co-Co bond.

So far, despite their high-risk nature, no AT1 bond has ever been bailed in. But Popular, as a mid-sized bank that has arguably exhausted all its possibilities of resurrection, is in a terribly weak position.

“It would be the first triggering of an AT1,” Lloyd Harris, an analyst at Old Mutual, told the FT. “These types of events are more likely for Popular than they ever were for Deutsche Bank,” he added, referring to Deutsche Bank’s Co-Cos that got trampled last year.

If a triggering occurs, PIMCO and other investors would take a hit. If Popular were wound down, many more wealthy global investors, particularly in Latin America, would also be hit hard. They include the Luksic, Chile’s richest family, which bought 3% of Popular’s shares at the beginning of May in an operation then valued at €87 million. It’s now worth little over half of that. Another investor that stands to lose big time is the Mexican billionaire Antonio del Valle, who invested €450 million in Popular in 2013.

In recent weeks rumors have abounded that a loose consortium of Latin American investors is planning to take over the bank, once its share price has tanked low enough. But for the moment, they are just rumors.

By now, the only bank that appears to still have a passing interest in buying Popular is Spain’s biggest bank, Santander, which would like nothing more than to get its hands on Popular’s retail business, in particular that massive portfolio of small business clients. But for that to happen, Popular’s over €30 billion of impaired real estate assets would have to be neutralized, almost certainly involving taxpayer funds. Something would also have to be done to nullify the class action law suits mushrooming on the other side of the Atlantic over Popular’s alleged misleading of investors in the lead-up to its last capital expansion, in 2016 (What’s the matter with these investors that bought the capital-expansion hype? Don’t these people read WOLF STREET?)

The big question is whether the ECB and the European Commission would lend their approval to such a takeover, especially if billions of euros of public funds are required. Having just awarded Italy’s Monte dei Paschi a last-minute reprieve, prompting accusations that even banks that are not too big to fail are still getting bailed out in Europe 10 years after the financial crisis, they may feel that the time has finally come to test out the EU’s bail-in law.

And if they do, a lot of investors, rather than taxpayers, could end up losing their shirts, which would be a welcome change, while market players may even begin questioning just how safe Spain’s saved banking system really is. By Don Quijones.

Banco Popular “itself cannot at this point make a rough calculation” of what its value is, “and if they can’t, neither can we.” Read…  Banco Popular’s Co-Co Bonds Plunge as Balance Sheet Chaos Revealed in Potential Forced Sale

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  44 comments for “Shock Waves Spread from Spain’s New Banking Crisis

  1. cdr says:

    As I mentioned before, I can’t follow south Eurozone banking crises. Part of this is willful. I’m fairly sure that nothing will happen that will hurt the Eurozone, no matter how bad things look on-the surface. This makes their problems an intellectual curiosity.

    The Eurozone has priorities.

    Why tax when you can borrow
    Why tax when you can print
    Therefore borrow and print
    Why pay for borrowing when you can use negative rates and print as needed
    Promise and stall
    Stall some more
    The project must prevail

    Bank debt:
    Use ECB as much as possible
    Filter to bad bank
    Ignore some more
    Say something important
    Ask the ECB for ideas
    Stall some more
    Ignore some more

    Finally … (not even close to being here yet)

    Stratify … who can be made to pay for it while making the project look like the damaged party. Applied Snowflake theory. Distract. Say horrible things about those who have the least ability to fight back while still looking important. Do NOT collect as this will be the start of the slippery slope.

    Pass the ball back to ECB
    Stall some more, the ignore it some more.

    • cdr says:


      You were right. Actual investors were sacrificed to save the bank.

      Times are a changin’ in the Eurozone. You can only kick the can so far for so long. Even they have limits.

      I’d bet real money that it will be years before anyone else sees a dime in actual losses not covered by some kick the can activity. Perhaps a new rescue fund will pop up and be financed with sovereign debt purchases by the ECB at a later date after going through a few hands (also called money laundering).

      • d says:

        I dont think popular has been saved.

        For the first time since 2008 in spain, at the moment the Taxppayer has.

        we will have to see what the final deal is for populars bondholders. And watch Satander which now needs to raise 7 B to bring its numbers into line.

        After taking on a lemon. I do not expect Satander to be paying tax or good dividends for a very long time. It will be interesting to see how Satander chooses to deal with its Large NPL Mountain.

        And Popular was not lucky as I thought it might be. Jamie Dimon did not come to the rescue with a $ 5.00 note.

  2. houtskool says:

    From 2014, Zerohedge:

    In Italy it seems they know the drill. Spanish Banco Popular is mentioned in this article too. Forget bail ins, that only works in the lower casts in western societies. Like Cyprus. It would be better for Spain to go all in on Bitcoin and forget about Target2. /s

    • Hiho says:

      Were Spain to change its currency, why in the earth should it go for bitcoin? Just go back to peseta and recover your own printing press.

      Maybe if money were printed to help the real economy recover and not to inflate the price of bubbles, the situation wouls be much better.

      Anyways, bitcoin is a big lie, the great ponzi scheme. Just wait for to crush and a bunch of suckers jumping from some random building as they lose their life savings.

    • Frederick says:

      Houtskool yeah sure Put all their eggs in that wobbly basket That sounds like a plan Come to think of it probably no worse than the fiat/ parasitic system were all in now

  3. Sporkfed says:

    Let the game of Three Card Monte begin. Vague plans, obtuse language, and outright lies
    will permit the losses to be socialized.

  4. TJ Martin says:

    I’m going to go out on a limb here and say regardless of what does or does not happen with Popular in the end none of it will make a damn bit of difference to either the Markets or the overall economy and it’ll become just one more facade in this rapidly expanding global Potemkin Village .

    Understanding as the bard ( Randy Newman ) said ” I could be wrong now … but I don’t think so “

  5. Mark says:

    It is time for investors to take the hit on this junk. They knew what they were buying or should have

    • Jon says:

      Yes !! Until that happens in a big, solid way, this insanity will continue to circle the globe like a satellite in orbit………………………

  6. John Ryskamp says:

    One of these days the problems of the official banking system will trigger the collapse of the shadow banking system, and that’s when things will spiral out of control. That’s when it won’t matter what side of the trade you are on–you lose.

    That collision is the black swan. But has it landed yet? And where?

    • TJ Martin says:

      Perhaps the more appropriate question should be … will the Black Swan so much as make an appearance never mind land . Somehow with the current levels of reality distortion , Kafkaesque logic and Potemkin Village smoke & mirrors firmly in place .. honestly .. I’m beginning to seriously doubt it .

      • John Ryskamp says:

        Oh it will happen, but in a way no one could have precisely foreseen. Was it Gibbon who said something like: when one event brings enormous change, it is because innumerable events have made it possible for that one event to bring enormous change?

        • d says:

          “Oh it will happen, but in a way no one could have precisely foreseen.”

          Thats why its called a black swan.

          Somewhere in Euroland or china something will brake then look out.

  7. nick kelly says:

    So if you HAD to choose, would you rather invest in Italy or Spain?

    I’m going to go with Italy because these threats from Madrid to Catalonia scare me, even from Vancouver Island. You can muddle through a lot, but civil war, not so much.

    And it’s not like Spain doesn’t know what a civil war is.
    If the EU can’t stop it, I don’t know what use it is.

    • Hiho says:

      Im from Barcelona, and I can assure you that there will not be any civil war, at least not because of identity issues.

      This whole thing about Catalonia independence is just a smoke screen so cronies from both sides: madrid and catalonia can keep the herd under control.

      One of the things which deflated Podemos, apart from the most obvius which is the eu crushing siriza, was this very debate. Votes that wouls have gone there polarized to minority radical independentist parties in catalonia and to the Ibex35 brand-new party called ciudadanos.

  8. Bobber says:

    In the end it won’t matter who owns the money because it will be worthless. Pretty soon, a barter system will look pretty attractive because there is no middleman stealing value from you. The barter system is inefficient, but so is the fiat system when somebody continually and methodically devalues your money.

    • Wolf Richter says:

      I hope you’re not betting money on your theory :-)

    • Frederick says:

      I’m putting a portion of my life’s savings in precious metals and a portion in cash and the third portion in cash generating real estate in excellent locations No Bitcoin thanks

      • shaba says:

        It is great to see continued dismissal of Bitcoin and crypto. It needs the naysayers who don’t have an understanding of the problems it solves (many of the very problems most here are discussing). Without doubters it would never have been able to bootstrap itself and survive throughout the years.

        Wouldn’t go all in but learning about the system behind it is worth the time. Then you will probably look at it in a different light.

        • alex in san jose says:

          I don’t trust Bitcoin at all – firstly, how am I supposed to trust a currency I can’t hold in my hand?

          Those servers your mythic “money” reside on will be fine, until they’re not. The power winks out, silver and gold will still be there.

        • Hiho says:

          Bitcoin is for suckers. All this hype is just to lure stupid money in and let smart money out.

        • d says:

          the cryptos have the same problem as CNY/RBM there is nothing but manipulation and lies behind them.

      • thelocalpragmatist says:

        What ever happened to owning the means of production? Tools, tractors, earth moving equipment, metal and wood working machinery? No one seems to qualify this value.

  9. Bruce Adlam says:

    It reminds me of a game every body is trying to hang in there no one wants to be the one that breaks first. Is it going to be the US,EUROPE, MIDDLE EAST or CHINA? ???????

    • nick kelly says:

      In those sweep stakes the apparent US lead has recently taken a hit. As I commented I think 2 months ago, the US now has heightened political risk.
      In its quasi- monarchy, where one person is a co-equal branch of government, the incumbent is, at best, incapable of exercising the duties of office.
      Latest evidence: either falling asleep or having a mini- stroke will texting to Twitter. “… the negative press covefefe…”


      This stayed up for hours.

      Typo? We all make typos, especially on cheapo sites like Politico that don’t have spell check for comments.
      So what is the typo here? What two letters can you change to make a word, let alone a coherent thought?

  10. MC says:

    Banco Popular will become a “zombie bank”, like Italy’s Banca Etruria and for exactly the same reasons: politics.

    An Etruria bankruptcy would have meant a big loss of votes for Italy’s ruling PD, very much like Popular stands to lose the ruling PP a large number of those clients which are becoming so critical in modern day elections.
    And European institutions? As usual they’ll be told they can have their bail-in followed in short term by a bankruptcy, but they should not be surprised if next elections see those terrifying “Euroskeptic” parties such as Italy’s M5S gain ground.

    Etruria, together with her red sisters (these banks have long been very close to the Communists and their successor parties) has been effectively bailed out and will soon be unloaded upon some unsuspecting large bank (Unicredit probably, as Intesa San Paolo has already put its foot down). None of the culprits were punished and the Boschi family even got a position in the government for helping driving Etruria into the ground. Kinda like Marissa Meyer was rewarded for driving Yahoo into the ground.

    But Popular has little time. Opus Dei’s political power is on the wane after peaking around 2006 and Spain’s PP-led government depends entirely upon the goodwill of the PSOE just to survive.

    On a very related note, does anyone know how much Popular’s AT1 bonds yield relative to ordinary senior bonds? I am really curious to know exactly how depserate for yield investors are and I’ve long stopped buying bank bonds or even bother with them.

  11. Hiho says:

    What the spanish govenment should do is letting these greedy investors lose their the shirts, take over popular, fusionate it with bankia and use it as a core to create a public banking system.

    But instead what it will do is: bail out, let taxpayers save the day, further austerity policies to compensate rising deficit, and give the bailed bank away to el santander.

    Public losses, private profits.

    And Partido Popular or PSOE are going anyways the next election.

    What a stupid country.

    • Gershon says:

      What the spanish govenment should do is letting these greedy investors lose their the shirts, take over popular, fusionate it with bankia and use it as a core to create a public banking system.

      You seem to be under the delusional that Eurozone governments exist to look out for the national interest, instead of being adjuncts and enablers of predatory capitalism. The “privatized profits, socialized losses” crony capitalist economic model will continue until the global financial system collapses under the weight of its own fraud and speculative excesses.

      • Hiho says:

        I know, that’s why said: what it should do is x, but what it will actually do is y.

        Such a shame anyways.

    • d says:

      “take over popular, fusionate it with bankia and use it as a core to create a public banking system.”

      Why waste all the money required to do that.

      let them both go bankrupt and start a public banking system from scratch if you need one.

      Club-meds banking problems will not go away until the NPL losses are absorbed.

  12. Quadra says:

    ECB with 2 Billion a day whats the problem?

  13. Gershon says:

    The financial reckoning day, when it’s arrival can no longer be deferred by the full spectrum of central banker money-printing and extend-and-pretend trickery, is going to be cataclysmic. These gilded fools should’ve let the toxic waste get flushed out of the system in 2008 rather than making it orders of magnitude worse by giving the Keynesian fraudsters at the Fed and central banks to intervene to protect the reckless and greedy from their own poor judgement, while punishing the prudent and responsible.

  14. Lotz says:

    Interesting how when a bank is collapsing there’s plenty of bitcoin mentions now – more than gold.

    “I can’t hold it” comment makes me laugh thinking of how most people get married based on love – a lifetime contract based on a feeling that nobody can touch either.

    • d says:

      One day a crypto currency will come out with somebody or something solid behind it.

      The all you fly by night nobody’s, with your manipulated crypto ponzis, will be gone.

  15. Stevedcfc72 says:

    The ECB should as expected let Popular be wound down. This needs to happen at other banks, Monte De Paschi, two Veneto Banks, Co-Op in the UK for starters.

    The traditional banks have had nine years to get this mess sorted out and they haven’t – no more government intervention.

    • d says:

      “The ECB should as expected let Popular be wound down. This ==============sorted out and they haven’t – no more government intervention.”

      Great drum

      Here you are beating it to the choir.

      The only way the ECB will take note if if you start ramming down their throats. Even then until the evil little Mafosi at the helm is removed NO CHANGE WILL OCCUR.

      • Stevedcfc72 says:

        You’re right D even today Santander has taken over Popular kicking the can further down the road. We don’t know whether they have been forced by the Spanish Government to do that. If they have that’s a very dangerous move. Lloyds bank in the UK had to do that with HBOS and they ended up getting bailed out. With Santander being the biggest bank in Spain, it could bring down the whole pack of cards.

        I’ll put my drum away lol.

  16. Klaus says:

    Every single shareholder wholly wiped out.

    Every single CoCo holder wholly wiped out.

    A new era has begun

    • Stevedcfc72 says:

      Yes Klaus good news that as it should be the shareholders-Co Co’s lose.

      Bad news from the point that 10,500 staff at Banco Popular will lose their jobs overtime as the business is sucked into Santander.

      The big question is the Spanish people’s confidence in the similar size banks to Popular. At this moment in time I would rather keep my cash in a bigger bank. This could have a big effect on banks such as Bankia in Spain. Their income has dropped 13% in the 1st quarter year on year.

      • Klaus says:

        I would think that if you have the similar incentives, similar approaches to the market, similar capabilities, etc…you tend to obtain similar results unless you have a distinctive mark (particularly bright people, bright risk management or different market positioning) which is not particularly usual.

        Therefore, I tend to assume that every bank in Spain is in similar conditions as for its operations in Spain. Of course, Santander or BBVA are present in different countries with different business and credit cycles so their are better hedged.

        Bankia is a different case as, although it has only operations in Spain, it was over-bailed out

        Obviously this assumption is the same for every other bank in every individual country (Italy, France, etc)

      • d says:

        Bankia is part of the can.

        That spain and the ECB have been kicking since 2008.

        Lehmans got brought for a $1.00

        The came the bears Implosion.

        As you note there is far to much complacency in and about Eurozone banking.


        I would love to know the deal between, Satander, the Eurozone Authority’s, and the Spanish Government.

        My guess would be a deal to carry tax losses forward from this merger, almost indefinitely. Which would make it much easier to reduce the NPL mountain.

    • d says:

      Not necessarily. whats the deal for the other bond holders.

      But Spanish banking and the Eurozone may finally be heading back on the correct road after the unjust state bailout of MDP.

      Some stake holders in italy in a larger institution, have to get this treatment as well, or there is a equality of resolution issue, based in nationality rising.

      This might make some people in Cyprus feel that perhaps there is a little tiny element of justice in the Eurozone after all.

  17. Gershon says:

    More extend and pretend as one insolvent Spanish bank swallows another.€100

Comments are closed.