Portugal is to inject 4.4 billion euros (US$5.9 billion) into crisis-hit Banco Espirito Santo (BES), Bank of Portugal Governor Carlos Costa announced on Sunday, amid fears of a potentially catastrophic run on the bank.
The country’s third-largest banking group is to be split into two entities, with its toxic assets located in a “bad bank” and its healthier assets regrouped in a new bank called Novo Banco, Costa said.
Novo Banco is to be controlled by the resolution fund set up by Portugal’s banks as part of the conditions for a 2012 national bailout by a troika of the EU, IMF and European Central Bank (ECB).
Photo: EPA
In intervening to deal with the troubled bank, which recorded first-half losses of 3.57 billion euros last week, the Lisbon government is seeking to avoid contamination throughout its fragile economy and into the wider eurozone.
“There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system,” Bank of Portugal Governor Carlos Costa said, adding there was a risk of a payment default by BES which would endanger Portugal’s entire financial system.
The bad bank assets, including part of an Angolan affiliate, are to remain the responsibility of current shareholders to liquidate, with the likelihood of major losses.
Under new European rules, shareholders and bond holders have to contribute to any bailout before the state puts in taxpayers’ money.
French banking group Credit Agricole is among the main BES shareholders, with a 14.6 percent stake.
The European Commission in Brussels said that Portugal’s intervention “is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential adverse systemic effects.”
The cash injection from the state is designed to stop savers taking any more money out of the bank, and to assure them their money is safe, analysts said.
“Nothing changes for the [bank’s] customers,” Costa said. “They can carry out all the usual operations without any problems. BES from Monday [yesterday] will become Novo Banco, even if branches at first keep the old logos.”
At one stage during trading on Friday last week, BES’ market value sank by 1 billion euros in one minute in reaction to losses posted in the first half which were the worst ever recorded in the country.
“We have seen clients withdrawing their money from BES for a while now. There is no reason for it, but you cannot reason with panic,” said Joao Cesar das Neves, an economics professor at the Catholic University of Lisbon.
The bank was plunged into turmoil last month by suspicions that its holding company, the family-run Espirito Santo International (ESI), covered up a 1.3 billion euro hole in its accounts.
Then the bank’s head, Ricardo Salgado, was forced out before being arrested on Thursday last week in connection with money laundering allegations.
Fears that the bank’s collapse could have serious consequences for Portugal, which only exited a 77 billion euro EU-IMF rescue program in May, has worried global markets as questions resurfaced over debt in the eurozone.
Trading in BES shares was suspended on the Lisbon bourse on Friday last week after a 75 percent fall in value over the week.
To stop more panic selling, the Portuguese authorities planned to withdraw BES from the stock market yesterday, the Lisbon newspaper Diario de Noticias said in a report on Saturday.
This is the first test of the new transitionary rules before a European banking union is put in place in 2016, when all banks are to have to submit to supervision by the ECB to prevent taxpayers having to foot the bill for crashes.
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