Momentum has been growing despite a European Court of Justice ruling last July that the Slovenian government’s actions were not illegal. But the ruling also noted that EU bail-in guidelines are not legally binding and that bail-in is not a legal pre-requisite for state aid.

The Slovenian government forced full bail-in on all sub debt holders where in other cases in the EU most creditors have been protected. Indeed, even where there have been prima facie bail-ins, finagled post-hoc actions have often seen creditors reimbursed in full or in part.

In autumn 2013, five Slovenian banks were rescued by the state (plus one other a year later). Before any public money could be injected, however, the European Commission ruled that shareholders and subordinated bondholders would have to take first losses. Thousands of retail investors were wiped out by €598m of losses: €257m in the case of Nova Ljubljanska Banka (NLB); €120m at Abanka, €95m at Banka Celje, €64m at Nova Kreditna Bank Maribor (NKBM), €41m at Probanka and €21m at Factor Banka.

“If the EC doesn’t require a wipe-out of BMPS subordinated bonds even now, it will prove the claim that small EU countries such as Cyprus and Slovenia are treated as guinea pigs”

“There was a strong contrast in the treatment of state aid to banks in Slovenia and Italy, as the EC required ‘enhanced burden sharing’ [a pre-agreed codeword for full write-off without compensation] of all subordinated bonds in all three systemic Slovenian banks [NLB, NKBM, Abanka],” said Tadej Kotnek, a member of the Expert Council of the VZMD.

“The commission only granted state aid on December 18 2013 - after a delay of almost a year as the Slovenian government had notified the EC on January 7 of that year - the day after the wipe-out of all subordinated bondholders in the systemic banks had been officially entered into the court register,” Kotnek said.

Stark contrast

The contrast with the treatment of BMPS is stark. The Italian bank was granted government assistance on November 27 2013, which the EC said was in line with state aid rules. In that communication, there was no mention of write-down or write-off of any BMPS subordinated debt.

“The EC ‘forgot’ to mention sub bonds in its positive decision for BMPS to the point where it may have seemed it didn’t have any,” Kotnek said.

Adding insult to injury from the perspective of the Slovenian camp seeking redress is that the most recent bailout for BMPS violates the “one time, last time” principle that disallows repeated bailouts.

“If the EC doesn’t require a wipe-out of BMPS subordinated bonds even now, it will prove the claim that small EU countries such as Cyprus and Slovenia are treated as guinea pigs in search of what would pass and what would cause excessive popular revolt or other trouble once a bank in a larger systemic EU country needed state aid,” Kotnek said.

BF weighs in

The case has been taken up by the Brussels-based European Federation of Investors and Financial Services Users, aka Better Finance. “Largely ignored, Slovenian investors suffer the consequences of the harshest bank rescue to date” was the headline in the organisation’s release of December 9, the day after managing director Guillaume Prache had taken the case to a meeting of the EBA’s Banking Stakeholder Group.

“The actual implementation of bail-in rules in the case of the Slovenian banks is hitting non-insider retail investors really hard, and does not give them a fair shot at recovering their damages three years after their savings in those banks’ subordinated bonds were completely wiped out,” BF said.

Describing the treatment of NLB, the biggest Slovenian bank, as “astonishing”, BF noted that in November 2013, NLB’s published financial statements disclosed positive net equity of €835m but a month later the ECB’s asset quality review evaluated net equity of a negative €318m. “Too bad for retail bank investors who trusted the bank’s financial statements,” BF said.

BF is aggrieved that neither NLB nor the central bank have disclosed any information to non-insider bond investors regarding the AQR despite what it said was a legally binding order by the Slovenian Information Commissioner to do so. BF also made reference to several material inconsistencies uncovered by the Slovenian Audit Court.

The Slovenian Constitutional Court ruled in October 2016 that bail-in legislation enacted in November 2013 violated the constitutional right to effective judicial protection, as it imposed an impossible quantitative burden on expropriated investors seeking damages. The court found two articles of the country’s banking act and bank resolution act to be unconstitutional and ruled that a new law has to be adopted by April 2017 at the latest.