This FT Editorial comments that Madrid is right to defend the rights of hoodwinked investors. But the government's plan is not the way to solve this problem.
Madrid’s motives are understandable. Several cases of mis-selling were so blatant and hideous that writedowns are likely to cause a backlash against the government and the banks. There are also fears that infuriated depositors would pull their money out of the institutions involved, aggravating their precarious situation.
For all Madrid’s good intentions, however, Brussels should resist this plan. Repaying investors in full – even if at a later stage – goes against the sound principle that creditors should be forced to take a hit before any taxpayer money is injected into a bank in difficulty. Alongside innocent victims of mis-selling, the scheme would compensate sophisticated savers who consciously sought high returns when buying these banks’ hybrid debt.
To restore confidence in the cajas, Madrid should also ensure that those responsible for mis-selling are properly held to account. The banks’ new management should commit to more transparent behaviour. Encouragingly, this is already happening in some institutions. If necessary, Spanish law should be amended to prevent such practices from reoccurring.
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