08 August 2014

Winners and losers from €4.9bn Banco Espirito Santo bailout

The €4.9 billion bailout of Banco Espirito Santo will safeguard depositors at the expense of shareholders and places a significant burden on Portugal’s state finances.

​​​​​The collapse of Banco Espirito Santo comes at a time when Portugal's government is already under intense scrutiny from the public for its handling of the economy. Photo:​ Shutterstock 

​If anyone thought Europe's banking crises were over, news from Lisbon this week must have come as a reminder that there is still, among financial institutions, a lot of murky goings-on yet to be unearthed.

Portugal is to spend €4.9 billion to bail out Banco Espirito Santo (BES), the country’s largest listed bank, in a move that tests the Eurozone’s ability to withstand another banking ​crisis.

The bailout, which is predicated on splitting up BES into a ‘good’ bank and ‘bad’ bank, will safeguard depositors at the expense of shareholders.

Portugal only exited a €77 billion EU-IMF rescue programme in May and the move is seen as a way to protect against contagion spreading through Europe’s fragile banking sector.

Shareholders have been slammed, losing virtually all their investments. BES’s stock had already plunged 89 percent since the first signs of the scale of the financial problems at the lender were revealed earlier this summer.

BES’s exposure to the failing Espírito Santo group led to a catastrophic €3.58 billion first-half net loss that triggered the meltdown.

Essentially the deal will protect taxpayers and senior creditors, leaving shareholders and junior bondholders holding toxic assets in the ‘bad bank’. 

Hugo Dixon, editor at large for Reuters, said on Twitter that the deal was a “much cleaner job than Cypriot bank resolutions of last year”. 

Unlike in Cyprus, no haircut is to be applied to senior unsecured debt. 

Pieria associate editor, Frances Coppola, notes in a blog post: “Bondholders and large depositors are no doubt breathing a huge sigh of relief: eighteen months later and they would have been facing losses. The Cyprus solution - haircuts on large deposits and senior bonds to protect the sovereign balance sheet - will become law across the whole EU from January 2016.” 

There are also big doubts about how BES has been managed. A Bank of Portugal statement effectively “alleges embezzlement, non-compliance with regulatory decisions and failure of fiduciary duty to shareholders”, says Coppola.

Portuguese authorities are also being scrutinised. It was only a month ago that they allowed a capital increase in which BES raised €1 billion - money that has since vanished as the share price collapsed.

Credit Agricole, which owned about 15 percent of BES, has already stuck the knife in.

The French bank was “deceived” by the Espirito Santo family and blamed “bad practices that were unknown to us and outside of any governance procedure” of the Portuguese bank, chief executive officer, Jean-Paul Chifflet, told Bloomberg. It is now pursuing legal options to defend its interests. 

While Carlos Cosa, Portugal's central bank governor, says the bailout “carries no risk to public finances or taxpayers”, it will ultimately be Portugal’s consumers who foot the bill as they underwrite the Novo Banco (the new ‘good bank’) before it likely is sold off piece by piece.

But the real worry could be with the bad bank.

Coppola notes that neither the Bank of Portugal nor the European Commission has thought about the potential impact on Portugal’s state finances if the "bad bank" incurs losses in excess of the value of shareholders' funds and subordinated debt. 

“Protecting senior creditors could turn out to be a very bad decision,” she says.

No one is yet talking about Greece, but the signs are not great for Portugal and prospect of another banking crisis must be sending shivers down the spines of European finance chiefs. Clearly the Eurozone is not out of the woods yet.


​​

The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

Disclaimer: This material should be considered as a marketing communication under the Financial Conduct Authority's rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Capital Markets UK Limited ("SCML") undertakes reasonable efforts to ensure that any information published in this communication is reliable. SCML makes no representation or warranty, or assumes no liability, for the accuracy or completeness of any information contained in in this communication.

SCML provides an execution only service and this communication does not take into account any particular recipient's investment objectives, special investment goals, financial situation, and special needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and SCML assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation.

Saxo Capital Markets UK Limited is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.