Portugal has announced it will spend €4.9 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, or 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, which last week tipped the bank in to a record €3.6 billion loss.
The bad bank's losses will be born by the bank's junior bondholders and shareholders, including the Espirito Santo family, which has a 20% stake, and French bank Credit Agricole which owns 14.6%.
Novo Banco, or New Bank - will be recapitalided to the tune of €4.9 billion by a special bank resolution fund created in 2012. The Portuguese state will lend the fund €4.4 billion. All of BES's depositors will be protected as well as all of the bank's senior bondholders.
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.
Setback for Portugal
The bailout is a setback for Portugal just months after the country emerged from a €78 billion, three-year bailout financed by the European Union (EU) and the International Monetary Fund (IMF).
Portuguese bond yields rose to 3.78% on Friday on expectations Lisbon would have to rescue BES. However they were still far below rates of more than 15% seen in 2012, when there were serious doubts whether the eurozone would be able to survive a brewing debt crisis.
The rescue, which comes a year after Greece spent €28 billion to rescue four of its banks, suggests that despite years of efforts to improve the euro zone’s financial and economic management, hidden problems still may lurk in the region’s banking systems.
The Portuguese government loan will use up a large chunk of the €6.4 billion left over from a fund earmarked to aid the country's banks as part of its EU/IMF bailout.
Commission approves aid
The European Commission said on Sunday (3 August) that Portugal's rescue plan was in line with EU state aid rules.
"The adoption of this resolution measure is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential adverse systemic effects," the EU executive said in a statement.
The Commission said a disorderly resolution of BES could have created a serious disturbance in the Portuguese economy and that the creation of bridge bank, holding deposits, senior debt and most of the assets, was a suitable remedy.
To limit market distortions, the latter's new business would be limited, it said.