Investors have cried foul, threatening legal action and claiming Portugal is discriminating between holders of the same class of bonds and thus breaching the pari passu principle of equal treatment to protect domestic bondholders.

“They are sending a signal that property rights and the rule of law in Portugal are not respected,” said Philippe Bodereau, portfolio manager at Pimco, one of the world’s biggest debt investors, which held some of the affected bonds.

“What is even more concerning is that such a course of action has been allowed to take place under the watch of the ECB, which as recently as November 2015 concluded that Novo Banco was viable.”

Europe’s new system, which puts bank bondholders at risk of a bail-in rather than leaving taxpayers on the hook for a bailout, was cemented with the creation on January 1 of the Single Resolution Board. This new body will take over responsibility for deciding when a bank has failed and for overseeing its “resolution”.

The ECB declined to comment. But a person familiar with the Frankfurt regulator said that Portugal had acted under national law and so did not require ECB approval for the move.

“It is not clear whether the ECB has endorsed this plan but the fact that it has been allowed to take place should alarm providers of funding and capital to the eurozone banking system,” Mr Bodereau said.

“This raises serious doubt over whether other Portuguese entities are investable, and also raises questions about other midsized peripheral banks in Europe that are not exactly in great shape.”

Novo Banco was under pressure from the ECB to remedy a €1.4bn capital shortfall identified by a stress test last November, particularly as its balance sheet was deteriorating, according to people familiar with the matter.

“This is a classic example of the goalposts being moved yet again in an unpredictable fashion,” said Tim Skeet, chairman of the International Capital Markets Association’s working group on bail-in.“

It is not that investors are saying no to the principle of write down at bail-in, but they are asking for consistency and predictability. We don’t appear to have those elements.

Investors said another example of inconsistency was Austria’s recent attempt to slash the cost to taxpayers of bailing out Hypo Alpe Adria bank by imposing losses on bondholders through a reversal of guarantees given by the province of Carinthia.

Davide Serra, chief executive of the Algebris fund that invests in bank debt, said: “We are two to three years into European banking union, but each time something happens they are making it up as they go along. It is shocking.”

“If they want to protect voters and screw creditors, fine, but it will come at a cost eventually — there will be a higher cost of funding for that country’s banks.”

Source: Financial Times