Portugal Unveils Plan to Rescue Bank
Learning
objectives
In this article, you will
- learn about troubles facing a big Portuguese bank
- practice key vocabulary on the topic of banking
- learn about "unveiled" and the adverb "then."
LISBON—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.
In a statement, the European
Commission said the solution found was in line with state-aid rules.
Behind the bank's quick
deterioration was a €3.6 billion first-half loss reported on Wednesday. While
the Bank of Portugal was expecting losses close to €2 billion, it found out the
lender continued to increase its exposure to the parent, Espírito Santo
International SA, and related entities in the second quarter against its
instructions.
The bank's management was then led by
Ricardo Salgado, who is also the patriarch of the Espírito Santo family that
controls Espírito Santo International. He left the bank last month. A new
management team under Chief Executive Officer Vitor Bento is now trying to save
the lender.
Mr. Costa said Portugal is rescuing
Banco Espírito Santo using a bank-resolution fund that in theory is financed by
the country's financial sector. But because that fund is almost empty, it will
receive a €4.4 billion capital injection with part of a credit line set aside
under Portugal's 2011 bailout program.
The European Union and the International
Monetary Fund lent €78 billion under the three-year program that ended in May.
Part of the loan—€12 billion—was set aside to help capitalize banks in case of
need. There is more than €6 billion of that money left.
Under resolution-fund rules, a bad
bank will be set up with toxic assets from the lender, including the loans
given to Espírito Santo entities that could be unrecoverable, and 56%-owned
Banco Espírito Santo Angola, with a portfolio of souring loans. Current
shareholders, including Banco Espírito Santo's parent, with a 20% stake, and
France's Credit Agricole SA, with a 14.6% stake, will stay with the bad bank,
along with subordinated creditors. The bad bank will be wound down.
Shares of Banco Espírito Santo have
fallen more than 65% since Wednesday. They were halted from trading Friday at
12 euro cents.
The good bank, meanwhile, with all
the deposits and other healthy assets, will receive the capital injection. It will
be rebranded.
Authorities hope that by separating
the healthy part of the bank from the bad, investors will be interested in
buying it. Proceeds will be used to pay back the bailout loan.
Banco Espírito Santo's woes came to
light in May, when the bank said an audit ordered by the Bank of Portugal found
irregularities at Espirito Santo International, which was in serious financial
condition. The conglomerate and four units have filed for creditor protection
since last month.
The Portuguese prosecutor's office
has said it is investigating matters involving the companies, without
disclosing more. Mr. Salgado was recently detained for questioning under a money-laundering
investigation. He said he "believes truth and justice will prevail."
The Espírito Santo empire traces its
roots back to a foreign-exchange business, started in 1869, that eventually
became Banco Espírito Santo. Along the way, the lender became a shareholder in
many businesses, from insurance to industrial firms. Besides the bank, the
conglomerate's holdings include the Tivoli Hotels & Resorts chain and
properties in Portugal and Brazil, a Portuguese insurance company, some small
energy projects in Brazil and a stake in a Portuguese hospital operator.
