Learning English by Reading Articles

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.