News Column

Espirito Santo rescue drains bailout fund

August 5, 2014

TIM WALLACE



PORTUGAL'S bank rescue fund is now close to empty, analysts warned yesterday, meaning any further bank failures could need taxpayer cash.


Banco Espirito Santo's 4.9bn (3.9bn) rescue deal was funded by a bailout pot, built up by the country's banks.


Under the deal good assets including bank branches and deposits, and the UK investment banking arm, will go into a recapitalised new bank called Novo Banco.


As a result normal bank current account holders and savers should be unaffected by the change.


Senior bondholders of Espirito Santo will continue as investors in this healthy unit.


The remainder will go into a so-called bad bank, which will be wound down over the coming years.


Shareholders - including the Espirito Santo family - and junior bondholders will be left with these toxic assets, as part of the plan for investors to bear the bur-den of the bank's losses - unlike in some of the crisis-era bailouts.


However, the bank resolution fund is only two years old and has not had time to gather sufficient funds.


The deal is in part funded by a loan, made up of aid given by the Eurozone and the International Monetary Fund (IMF) to prop up the Portuguese government.


The government insists taxpayers' money is not on the line, as it has given the loan to the bailout fund, which will be able to repay it as banks contribute to the fund in coming years.


In addition, when the bank is sold publicly the rescue fund hopes to recoup the cost of the recapitalisation.


But analysts at ratings agency Fitch fear it leaves the resolution fund in a precarious state.


"The establishment of Novo Banco will significantly reduce the cash buffer set aside for Portuguese banks to around 2bn, which may limit its effectiveness," Fitch said.


"There would therefore probably be a fiscal impact if other banks needed support."


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Source: City A.M. (UK)


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