Portugal to spend 4.9b euros to bail out troubled bank

Portugal will spend 4.9 billion euros (HK$51 billion) to rescue its largest listed bank, testing the euro zone’s resilience to another banking crisis just months after Lisbon exited an international bailout.

The rescue of Banco Espirito Santo, which was unveiled after a frenzied weekend of discussions between Portuguese and European Union officials, comes after weeks of increasingly bad news about the financial state of the lender, particularly its exposure to a cascade of companies headed by its founding Espirito Santo family.

Under the plan, Banco Espirito Santo (BES) will be split into a “good bank”, renamed Novo Banco, and a “bad bank”, which will house BES’s exposures to the troubled Espirito Santo business empire as well as its Angolan subsidiary.

The bad bank’s losses will be borne by the bank’s junior bondholders and shareholders, including the Espirito Santo family, which has a 20 per cent stake, and French bank Credit Agricole which owns 14.6 per cent.

Novo Banco, or New Bank – will be recapitalised to the tune of 4.9 billion euros by a special bank resolution fund created in 2012. The Portuguese state will lend the fund 4.4 billion euros.

All of BES’s depositors will be protected, as well as the bank’s senior bondholders.

Portugal’s central bank, which only days ago said BES could be recapitalised by private investors, said the plan would involve no cost to the public purse, because the loan would be temporary.

The Bank of Portugal expects the state to be reimbursed when Novo Banco is eventually sold to private investors.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters in a late-night news conference in Lisbon on Sunday.

The bailout is a setback for Portugal just months after the country emerged from a 78 billion euro, three-year bailout financed by the European Union and the International Monetary Fund.

The Portuguese government loan for the BES rescue will use up a large chunk of the 6.4 billion euros left over from a fund earmarked to aid the country’s banks as part of that bailout.

Portuguese bond yields rose to 3.78 per cent on Friday on expectations Lisbon would have to rescue BES. However they were still far below the rates of more than 15 per cent seen in 2012, when there were serious doubts whether the euro zone would be able to survive a debt crisis.

The rescue, which comes a year after Greece spent 28 billion euros to rescue four of its banks, suggests despite years of efforts to improve the euro zone’s financial and economic management, hidden problems may still lurk in the region’s banking systems.