- POSTED: 04 Aug 2014 19:18
Portugal is launching a near 5.0-billion-euro (S$8.37 billion) EU-backed rescue for banking giant Banco Espirito Santo to avert a wider crisis across the financial system.
LISBON: Portugal is launching a near 5.0-billion-euro (S$8.37 billion) EU-backed rescue for banking giant Banco Espirito Santo to avert a wider crisis across the financial system.
Faced with the risk that the bank might crash and put the eurozone country back in danger, the Portuguese central bank announced a rescue package of 4.9 billion euros on Sunday. Last week Banco Espirito Santo reported a first-half loss of 3.57 billion euros - the worst ever reported in Portugal - sending its shares plunging.
Its three holding companies were already in administration.
The Portuguese state will provide 4.4 billion euros of the bail-out from rescue funds already available to it under a national bailout programme from which the country had only emerged in May.
In Brussels, the European Commission gave its approval, saying that the terms - including the creation of a new bank and measures to ensure shareholders pay a heavy price - would not distort competition.
SYSTEMIC DAMAGE AVERTED
The Commission said the rescue would "restore confidence in financial stability" and avoid the risk of "systemic effects".
All the bank's viable assets are to be put into a new bank called Novo Banco under new EU procedures introduced at the height of the eurozone debt crisis. All the bad assets will stay in BES, which is to be "wound-down" on the backs of "all shareholders and subordinated creditors", the Commission said.
It also made it clear that shareholders, and not taxpayers, will bear much of the cost - thereby minimising the link between the bank's failure and the sovereign bond market where Portugal borrows money.
This is significant because it enacts the principles of a new EU bank resolution system, and because Portugal has only recently managed to pull itself out of a three-year bailout organised by the EU and the International Monetary Fund.
The crisis at BES, the biggest private bank in the country and third-biggest overall with vast interests throughout the economy, threatened to wreck Portugal's fragile new-found confidence. The country's borrowing costs edged down in early trading on Monday, although the market response was muted, with the interest rates on existing Portuguese 10-year bonds falling to 3.684 percent from 3.701 percent on Friday.
BES is in difficulty largely because of suspected improper accounting practices in the accounts of the Espirito Santo Group of companies built around three holding companies.
The state will inject 4.4 billion euros into BES, Portugal's central bank governor Carlos Costa said late on Sunday hours before the markets opened, in an announcement timed to avert the risk of a catastrophic bank run.
"NOTHING CHANGES FOR CUSTOMERS"
"Nothing changes for the (bank's) customers," Costa said. "They can carry out all the usual operations without any problems. BES from Monday will become Novo Banco, even if branches at first keep the old logos."
Novo Banco will be controlled by the Resolution Fund set up by Portugal's banks as part of the conditions for the 2012 national bailout by the IMF, the EU and the European Central Bank (ECB).
"There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system," Costa said.
French banking group Credit Agricole, which is among the main BES shareholders with a 14.6-percent stake, is to report results on Tuesday which may reveal the extent of the damage it has suffered.
At one stage during trading on Friday, the market value of BES sank by one billion euros in a single minute in reaction to its first-half losses. Trading in BES shares was suspended in Lisbon on Friday after a 75-percent fall over the week.
Europe's main stock markets climbed at the start of trading on Monday as investors reacted positively to news of the planned rescue. The structure of the rescue is the first test of new transitionary rules before a European banking union is put in place in 2016.