Portugal investors demand bank bond money back or will boycott European fund

The lack of transparency requirements on the use of EU recovery funds risks corruption and undermining public support, argue Helen Darbishire and Karolis Granickas. [European Central Bank / Flickr]

This article is part of our special report Recovery fund: the engine behind the European transformation.

A group of international institutional investors coordinated by the Attestor Capital fund, on the hook for €2 billion in the Banco Espírito Santo case, want the European Commission to settle the case, warning that otherwise, they will not fund the post-pandemic economic recovery.

“It is essential that the law is respected in member states and that there is no political influence. We want information about what is happening and to be compensated for what we have lost,” the investors said in a statement, demanding “guarantees of redress and equitable treatment before considering partial funding of the EU recovery fund.

According to a source from the group of eight investors – called ‘Recover Portugal’ – “for now, the legal action is focused on the BdP [Bank of Portugal], but, “if the matter is not resolved, they will undoubtedly be forced to take legal action against the European Commission”.

In a video posted online, this group of institutionalists who invested in bonds of the former Banco Espírito Santo (BES) claims to have “good and bad news” to give to Europe.

“The good news is that the EU will distribute €750 billion to member states, through the European Recovery Fund, to help them recover from the crisis generated by COVID-19,” they said.

“The bad news is that before distributing this money, the European Union has to borrow it, and that could be a problem because international investors are quite unhappy with the EU and Portugal,” they pointed out.

The group warns that if the EU wants to get this €750 billion from international investors, “it first has to show them that it will treat them fairly and equitably, by first resolving the issue” of BES.

At a time when the Portuguese are “under the gaze of the world” for occupying the presidency of the Council of the European Union, ‘Recover Portugal’ calls into question both the country’s ability to manage the EU funds that are coming and the capacity of its legal system for “not working in cases like this”, which has been dragging on for six years.

At issue is the decision taken at the end of 2015 by the Bank of Portugal, faced with the capital needs of Novo Banco (the “good bank” that resulted from the BES resolution process), to retransfer responsibility for five lines of senior bonds of BES – which, at the time of the resolution measure in August 2014, had passed to Novo Banco – back to the “bad bank”, which kept the toxic assets.

In a statement released at the time, the BdP explained that this measure was “necessary to ensure that the losses of BES are absorbed first by the shareholders and creditors of that institution and not by the banking system or taxpayers”.

The supervisor then added that “the selection of these issues was based on reasons of public interest and was aimed at safeguarding financial stability and ensuring compliance with the aims of the resolution measure applied to BES”, protecting “all depositors, creditors for services rendered and other categories of ordinary creditors”.

However, the institutional investors holding these bonds accuse the BdP of discrimination by nationality, claiming that the five lines chosen by the regulator were “held by foreign investors, not Portuguese” and “the only ones managed by Portuguese law and not by international law”.

“We want to recover the more than €2 billion that was taken from us. The interests of investors must be protected, and we must ask the Portuguese government to solve the Novo Banco problem as soon as possible. This is what many investors are waiting for,” ‘Recover Portugal’ said.

Reiterating their “continued concern about the situation in Portugal” and the “eventual suitability and capacity [of the country] to manage such large funding” as that coming from the European Recovery Fund, the group of aggrieved investors believes that “the BES case has put Portugal at the centre of a controversy”.

“Being a candidate for grants worth more than 4% of its Gross Domestic Product, €45 billion in the coming years from the Next Generation EU fund, it nevertheless raises dire questions about the seriousness of the country’s judicial system,” they said.

They pointed out that the European Commission had “identified lengthy cases and long delays in Portugal’s administrative and tax courts and called on the country to implement its recommendations to increase the efficiency of administrative and tax courts, namely by reducing the length of proceedings.”

“It is good that they want to invest money in digitising the judicial system to speed up the resolution of cases and improve technology, but we need to solve the cases that have been blocked for political reasons. Unfortunately, this does not suit the European Union,” said ‘Recover Portugal’.

Stressing that it is “important for the European Commission and all members to put pressure on these unresolved cases”, the group considers it “unacceptable that investors have been expropriated, without any solution so far”.

“Recover Portugal demands respect for the rule of law in the member states”, it concluded.

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