Flip-Flop of Prior Flip-Flop by Spanish Supreme Court Flip-Flops Bank Stocks

There’s nothing like a sympathetic Supreme Court.

Spanish bank stocks had their best day’s trading for months on Wednesday, with the MCE Bank Index rising by 2.6%. At one point the stock of interminably troubled Banco Sabadell had soared over 13%, before settling to finish the day up 2.5%. The reason for such market exuberance was perfectly rational: After two days of deliberation, 28 Supreme Court judges on Tuesday evening voted by a thin margin (15 to 13) to strike down a previous ruling by a different set of Supreme Court judges that would have hurt the banks’ lending business by forcing them, rather than mortgage borrowers, to pay the contractual tax on mortgage loans.

It’s the first time in the Supreme Court’s history that it has flip-flopped like this, by overturning a ruling of its own creation.

What terrified the banks was the prospect of the change of law being applied retroactively, resulting in crippling legal costs and compensation. Spain’s legal system allows customers to reclaim compensation from tax authorities for cases going back four years. That could have could come at a cost of €5 billion, Budget Minister Maria Jesus Montero said on Tuesday.

In the worst case scenario for the banks, in which the ruling would have been applied retroactively to the past 15 years, the maximum limitation period for civil claims, the total bill could have run to over €16 billion — almost the equivalent of two years of the banks’ net domestic profits

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