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26/08/2016

Lisbon allegedly blows €1 billion in bad liquidation deal

Euro & Finance

Lisbon allegedly blows €1 billion in bad liquidation deal

Portugal's banking institutions were hit particularly hard by the financial crisis.

[Yellow.cat/Flickr]

The Portuguese government could have saved up to a billion euros in a deal that saw one of its major banks liquidated, if it had taken care of senior bondholders, as proposed by Brussels. 

According to a report published today (18 January) by Portuguese weekly Expresso, the European Central Bank (ECB) sent an email to Mário Centeno, the Minister for Finance, in which it recommended that any deal over the future of Banco Internacional do Funchal (BANIF) should take into account the state of senior bondholders and that between €500 million and €1 billion could have been saved this way. BANIF found itself in trouble when it was inable to repay an earlier injection of €1.1 billion.

However, the Ministry of Finance today denied that the proposal put forward by the European institution would have granted such significant savings.

Lisbon argued that involving senior bondholders in the scheme would have raised doubts and erased trust in the Portuguese financial system and could have had “dire consequences for Portuguese financial stability and welfare”.

>>Read: Portugal marks three decades of EU membership

Ultimately, the government decided to liquidate the bank, without involving senior bondholders, which necessitated a injection of around €3 billion of public money.

The “good” parts of the bank and any of its healthy assets, its senior bondholders included, were sold off to Spanish bank Santander for €150 million.

The BANIF affair contrasts with the case of Banco Espírito Santo, which in 2014 was split up by the state’s central bank, Banco de Portugal, into two separate entities, Novo Banco, which retained the healthy parts of the business, with the toxic assets remaining in the existing bank. 

Recapitalisation of the bank was carried out at the expense of its major investors, which included its senior bondholders. The Portuguese government will vote at the end of the month on a commission to investigate what happened with the BANIF deal.