Portugal rescues BES bank to avert eurozone crisis

FE Team | Published: August 05, 2014 00:00:00 | Updated: August 04, 2014 21:52:32

LISBON, Aug 4 (AFP): Portugal is launching a near 5.0-billion-euro 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 ($6.6 billion) 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.
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 per cent from 3.701 per cent on Friday.