Coverage: Portugal is biggest banking story

This week (or at least Sunday) Portugal is the biggest banking story as it looks to bail out one of its lenders. It seemed that the Euro-crisis was past, but there are still problems that need to be resolved.

Patricia Kowsmann had this story in The Wall Street Journal:

Portugal’s central bank late Sunday unveiled a plan to rescue the country’s second- largest lender by breaking up the bank and pumping in billions of euros of state money.

The fate of Banco Espírito Santo SA is surprising given that only a few weeks ago the Bank of Portugal said the lender had enough capital to withstand shocks coming from its parent, a Luxembourg-based conglomerate that ran into trouble after an auditor found accounting irregularities.

Banco Espírito Santo not only provided loans to the parent and its units but it also sold billions of euros of their debt to customers.

Under the €4.9 billion ($6.6 billion) plan, depositors and senior bondholders will be spared, while the bank’s subordinated creditors and current shareholders will be in line for losses.

“It became imperative and urgent that a solution was implemented to guarantee deposits and safeguard the financial system,” said Bank of Portugal Gov. Carlos Costa, who added that the bank had lost access to liquidity beginning Monday.

The New York Times story by Jack Ewing and Chad Bray said the bailout would be costly despite the bank’s relatively small size:

With total assets of €76.6 billion, or about $103 billion, at the end of March, Banco Espírito Santo is nowhere near large enough to rank among the eurozone’s largest banks. Still, the rescue will be costly for a country that emerged from an international bailout only months ago.

Problems at Banco Espírito Santo, undone by its exposure to its struggling corporate parent, also raise questions about what other troubles may still lurk in the European banking system.

In another recent bank failure, Corporate Commercial Bank in Bulgaria closed on June 20 after a three-day run in which some $700 million — about a fifth of the bank’s deposits — was withdrawn.

The announcement early on Monday came just days after the Bank of Portugal, the country’s central bank, had offered assurances that Banco Espírito Santo could raise enough money from private investors to recover from a first-half loss of €3.58 billion.

On Monday the Bank of Portugal portrayed the rescue as being paid for by the country’s bank resolution fund, which is bankrolled by financial institutions. The government will loan the fund €4.4 billion of the €4.9 billion cost of the bailout, however. Eventually, the new bank will be sold in an attempt to recover the taxpayer loan.

The European Commission, which approved the plan, said it complied with new rules intended to minimize the cost to taxpayers while preventing disruption to the financial system.

Bloomberg’s Joao Lima and Anabela Reis offered these reasons for why the bank had to seek a bailout:

Banco Espirito Santo has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family and ordered the lender to raise capital. Bank of Portugal Governor Carlos Costa had sought to find private investors to inject the cash, and said government funds would only be a last resort. The Portuguese government has about 6.4 billion euros remaining from its European Union-led bailout in 2011 to fund the capital injection.

Shares of the lender plunged 73 percent in Lisbon last week to 12 euro cents, for a market value of 675 million euros, before the stock was suspended on Aug. 1. Banco Espirito Santo’s 750 million euros of 7.125 percent dated subordinated notes, part of its Tier 2 capital, were at 35.8 cents on the euro on Aug. 1 and its more-junior undated hybrid Tier 1 bonds were at 30 cents on the euro, down from 60 cents on July 30.

 “The full contribution of shareholders and of subordinated debt holders to the losses of Banco Espirito Santo will be ensured in accordance with the burden sharing rules” set out in 2013, the European Commission said in a statement yesterday as it approved the plan.

Subordinated bonds have been hit by European regulators seeking to share the cost of resolving distressed banks with bondholders, with losses inflicted on holders of junior debt of lenders including Britain’s Co-Operative Bank Plc and Spain’s Bankia SA. (BKIA)

Portugal is going with a “good bank”/ “bad bank” plan as a means to resolve the issues, according to the BBC News:

The group will be split into two – a “good bank” with the healthy assets and a “bad bank” with the riskier ones.

The “good bank”, which will be called Novo Banco, will be loaned 4.9bn euros ($6.6bn; £3.9bn) from Portugal’s bailout fund.

The move had been expected after BES on Friday reported a record loss of 3.6bn euros for the first half of the year.

Since June, when concerns about the financial health of the company first came to light, its shares have plunged 89%.

The company will be delisted from the stock market on Monday, with shareholders set to lose almost all their investment, says the BBC’s Alison Roberts.

It’s hard to believe there are still banking crises going on, but apparently there are still some issues in the system that need to be fixed. Portugal’s banking system has long been sited as problematic, but this bailout might be the beginning of fixing the issues and moving forward.