Insight: Spain bank rescue signals legal battle for duped savers

MADRID (Reuters) - Dressed in orange t-shirts and blowing horns, a group of factory workers, fishermen's wives and builders gather outside their savings bank in the small Spanish mountain village of O Rosal.

They have come to demand their money back, taping up posters that read: 'Tricked by the banks. Plundered by the government' in what has become a weekly protest.

"There are people on the edge of destitution. Their savings are all they have," says 60-year-old retired factory worker Argimiro Martinez, a customer of NovaGaliciaBank (NGB) since he was 7 years old and one of the protest organizers.

Martinez and his fellow demonstrators are among thousands of Spaniards who say they were conned by banks into exchanging their savings for preference shares: high-risk, complex financial instruments seized on by lenders in the financial crisis as a means of bringing in extra capital.

Many of the banks which issued these products swapped them for shares and bonds. The main state-owned banks such as NGB did not. NGB has apologized and some banks have offered compensation for the worst cases. But now the banks are negotiating with Europe for capital as part of an international bailout, the terms of which will include inflicting a loss on people who in many cases handed over their life-savings.

As the talks take place in Brussels, protests are gathering pace across Spain, both in the north-west region of Galicia - the seat of NGB bank - and in Madrid, where lender Bankia is based and where demonstrators have shown their anger outside the headquarters of Prime Minister Mariano Rajoy's People's Party.

Lawyers say these people were swindled, and forecast a flood of compensation claims worth hundreds of millions of euros.

"If I have been conned into buying a product I didn't want, it's a lack of responsibility on the part of the bank, the same as if I went into a branch and slipped and twisted my ankle because the floor was wet," said lawyer Ramon Ozores at Colon Abogados.

'FINANCIAL LUNG'

Spain has asked for up to 100 billion euros to fix its banking system, groaning under massive losses from a property crash and loan defaults.

NGB, at the centre of the mis-selling allegations in Galicia, is one of four banks alongside Bankia, CatalunyaCaixa and Banco de Valencia, which were rescued by the state and are first in line to get European Union funds.

Most Spanish banks sold preferential shares in the early months of Europe's debt crisis, to increase solvency ratios under stricter regulatory demands. They stepped up their marketing of these products from 2008, embarking on aggressive campaigns that often involved cold-calling customers.

Preferential shares are half-way between a share and a bond. They do not mature, are not protected by the state's deposit guarantee fund and stop paying out a coupon if the company falls into losses. In a 2006 Caixanova internal document seen by Reuters, management describe preferential shares as the 'financial lung' of the business, enabling the bank to shore up its capital and embark on an ambitious global expansion plan.

In the event of a bankruptcy, preferential shareholders are at the back of the queue, behind bondholders. Banks throughout Europe sold preferential shares. In Spain, banks pushed them as safe, fixed-term deposits from which customers could get their money out quickly.

In O Rosal, car factory worker Avelino Guisande's bank manager rang him at home in 2009 to ask him to drop by to discuss a savings plan for 40,000 euros of his severance pay.

Guisande, who has trouble reading having spent his youth looking after sheep on the mountains, says he signed the papers where he was asked, after being assured he would be able to get his money out with 48 hours notice.

"I didn't read anything, because to read those papers I'd have to take them home for a week. I read in my own way - a little and with difficulty," he says.

Guisande, now 60 and still jobless, has since discovered what he thought was a high interest savings account was in fact preference shares, and he cannot access the money.

Cashing in the preferential shares was dependent on a secondary market that collapsed last year, leaving 43,000 NGB clients unable to get to their savings during the worst recession in half a century.