Portugal Splits Banco Espirito Santo in Two

Portugal’s announcement late on 3 August that
Banco Espirito Santo (BES)
will be split into a ‘good’ and ‘bad’ bank has limited direct fiscal impact on the sovereign, but erodes the cash buffer available to deal with any future shocks, according to Fitch Ratings.

The ‘good’ bank, to be named Novo Banco (New Bank) will receive a €4.9bn capital injection by a special bank resolution fund created in 2012. The Portuguese state will lend the fund €4.4bn of the total.

The ‘bad bank’ will be left with BES’s exposures to the Espirito Santo business empire and its Angolan subsidiary. The latter’s losses will be borne by the bank’s junior bondholders and shareholders, including the Espirito Santo family, which holds 20%, and France’s Credit Agricole which owns 14.6%.

The bailout of Portugal’s largest listed bank was decided in weekend discussions between Portuguese and European Union (EU) officials. It comes less than three months after Portugal emerged from a €78bn, three-year bailout financed by the EU and the International Monetary Fund (IMF).

The country’s central bank, Banco de Portugal, which maintained until recently that BES could be recapitalised by private investors, said the plan would involve no cost to the public as the loan would be temporary. It expects the state to be reimbursed when Novo Banco is eventually sold to private investors.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters.

Reducing the Buffer

Fitch said that money already set aside for bank recapitalisation under the IMF-EU programme that Portugal has now exited is sufficient to cover the cost of the BES operation without additional borrowing. The operation would not therefore change the credit rating agency’s (CRA) fiscal forecasts for the sovereign, or put any pressure on Portugal’s BB+ rating.

However, setting up Novo Banco will significantly reduce the cash buffer set aside for Portuguese banks to around €2bn, which may limit its effectiveness. There would therefore probably be a fiscal impact if other banks needed support – although this is not Fitch’s base case assumption.

The government’s deposit buffer remains large, at around 7.6% of gross domestic product (GDP) but the cushion against possible market volatility, which helped Portugal make a ‘clean exit’ from its IMF-EU programme without a precautionary credit line, has shrunk.

Fitch added: “Whether BES’s bailout contributes to a reversal of the improvement in Portugal’s fiscal financing conditions may depend on investor perceptions of the health of the banking sector and if, like us, they regard BES’s problems as idiosyncratic.

“The spill-over risk appears contained for now, and short-dated Portuguese sovereign bonds continue to trade at multi-year lows. The ECB’s asset-quality review may help address any concerns of wider risks in the banking sector.”

The CRA also suggested that doubts about the effectiveness of monitoring by national authorities may also contribute to popular disillusion in Portugal with post-programme economic reform and consolidation, which could cause political commitment to the process to weaken.

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