The European Central Bank would no longer oppose the forcing oflosses on senior bondholders of euro-area banks, said two officialswith knowledge of the ECB's thinking.

A key condition to imposing losses is if the bank in question isbeing wound down, one of the officials said. The ECB supportedimposing losses on senior bondholders of ailing Spanish banks at ameeting of euro-area finance ministers in Brussels on July 9,though the proposal didn't get much traction, the other officialsaid. Both of them spoke on condition of anonymity as the talks areconfidential.

The Wall Street Journal today reported the ECB's change ofposition, after the Frankfurt-based ECB consistently opposedhanding losses to senior creditors of Irish banks following thecollapse of the country's financial sector. An ECB spokesmandeclined to comment on the WSJ report.

The ECB's position has evolved since it opposed forcing losseson the senior creditors of Irish banks including Anglo Irish BankCorp. and Irish Nationwide Building Society after the governmentstarted to inject capital into the banks in 2009. Then, the ECBargued that reneging on the senior Irish bank debt would damagefinancial stability in the wider euro area.

The ECB also opposed efforts to restructure Greek sovereign debtand refused to take losses on Greek government bonds held on itsbalance sheet earlier this year. European officials are nowdebating how best to rescue Spain's banks after its leadersrequested 100 billion euros ($122 billion) of international aidlast month, becoming the fourth euro nation to seek help afterGreece, Ireland and Portugal.

The cost of insuring against default on senior bank bonds roseafter the Wall Street Journal report. The Markit iTraxx SeniorFinancial Index of credit default swaps on 25 banks and insurersincreased eight basis points to 281.4, the highest in a week,according to data compiled by Bloomberg. Spanish government bondsfell, pushing the 10-year yield as high as 6.71 percent.

The European Commission today ruled out that senior “bail- ins”would be part of the Spanish bank rescue. Commission spokesmanSimon O'Connor told reporters in Brussels that the draft dealbetween the European Union and Spain “doesn't foresee participationof senior creditors.” Shareholders and junior creditors would beinvolved, he said.

ECB 'Turnaround'

“Politicians may find themselves under increasing pressure tochange this stance,” Michael Symonds, a credit analyst at DaiwaCapital Markets Europe in London, said in a note to clients. “TheECB's standpoint is notable as it reflects a turnaround from theirstaunch opposition to senior unsecured haircuts during the bailoutof the Irish banks.”

ECB President Mario Draghi may now be importing experience fromhis stint as head of the Financial Stability Board, which backedforcing senior bondholders to take losses when banks fail lastyear. The EU unveiled plans on June 6 that would empower regulatorsto impose losses on senior unsecured creditors of failing lendersby 2018.

A shift in position by the ECB raises the question of possiblechanges to Ireland's EU-International Monetary Fund bailout deal,as requests by Irish Finance Minister Michael Noonan to the ECB tobe allowed to write down senior bank debt were repeatedly rebuffedby former president Jean-Claude Trichet, who left office inOctober.

Noonan said on June 19 that the ECB's stance had “hardened”since last year. “We'll see how things play out in the future,” hesaid.

Noonan will meet Draghi in Frankfurt tomorrow to discuss “theongoing sustainability of the Irish financial system,” Paul Bolger,a finance ministry spokesman, said by phone today.

Bloomberg News

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