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Banco Espirito Santo: How to execute a €5bn bailout without costing taxpayers a penny

The Portuguese government should be applauded for not penalising taxpayers - but the bailout of Banco Espirito Santo shows banks are still too big to fail.

by Emma Haslett
Last Updated: 04 Aug 2014

Has the Portuguese government achieved the impossible? It’s found a way to execute the €4.9bn (£3.9bn) bailout of a major bank without taxpayers having to pay a penny. Miraculous.

How? After trading in its shares was suspended on Friday, Banco Espirito Santo was split into ‘good’ and ‘bad’ banks over the weekend – but instead of using funds from taxpayers, the Portuguese government used some of the €6.4bn left over from the bailout fund provided by the IMF and EU back in 2011.

This is after the bank posted results showing it lost €3.5bn in the first half of the year, leaving it with impairments of €4.25bn. Shareholders completely freaked out, sending shares down 42% on Thursday and 40% on Friday, before trading was suspended altogether. In fact, since June, BES’ shares have fallen a staggering 89%.

All the bank’s deposits, branches, workers and decent loans, plus all its senior creditors, have been shoved into the ‘good’ bank, imaginatively renamed ‘Novo Banco’ (‘New Bank’), which will then be put up for sale. Unfortunately, shareholders will find themselves lumped with junior debt holders and bad loans into the ‘bad’ bank, which will eventually be wound down.

What’s interesting about this predicament is what’s likely to follow: BES’ management is currently the subject of an investigation into ‘potential wrongdoing’ and a ‘forensic audit’ (sounds uncomfortable).

While senior bankers are seen to have got off pretty lightly after the financial crisis, it doesn’t look as though BES’ management will do quite so well: Portugal’s central bank has warned ‘regulatory and, potentially, criminal consequences’ will follow if they are found to have been responsible for ‘criminal acts’.

The good news is that BES has promised it has various private investors lined up to buy stakes in the bank as part of its plan to recapitalise (its core tier one capital ratio, essentially its loan-to-asset ratio, has dropped to 5%, way lower than the official target of 7%). But investors could be forgiven for being nervous: there are already suggestions BES could be the subject of even more impairments, thanks to its exposure to Espirito Santo group, which was the cause of all its problems in the first place. The impact of that still hasn’t been fully realised.

So this is by no means the end of this particular drama. But at least Portuguese taxpayers got off lightly…

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