A new Portuguese bank appeared on Monday, born from a collapsed business empire. On its website it called itself “stronger and safer.”
Investors were not convinced. The night before, authorities had put up 4.9 billion euros ($7.2 billion) to stop Banco Espirito Santo from going under, and then split it in two. Novo Banco kept the healthy businesses and is to be sold later. A so-called “bad bank” kept the old name and the toxic assets, and will be liquidated once the bad investments are dealt with.
How the story unravelled
A month earlier, officials had tried to prop up the falling share price, insisting the bank’s finances were sound and that private investors stood ready to take it over. The picture changed last week. The bank reported a record half-year loss of 3.58 billion euros, trading in its shares was suspended, and the Espirito Santo family’s three main holding companies asked for bankruptcy protection.
Bank of Portugal governor Carlos Costa went on television close to midnight Sunday and admitted that officials had been duped. Cash and debts, he said, had been shifted around the family’s business empire, which stretched from tourism to health care across four continents, in a kind of Ponzi scheme. The bank’s activities “were in clear violation of Bank of Portugal rules” and used “fraudulent schemes,” Costa said.
Police suspect Ricardo Espirito Santo Salgado, the former chief executive who stepped down last month, of fraud, forgery and money-laundering. The bank’s business dates from the 19th century, and for years it was Portugal’s biggest private bank.
“International experience shows that schemes of this kind are very hard to detect before they collapse, especially when it takes place in different countries,” Costa said.
Why were there no earlier warnings?
Costa gave one answer that worried people more. A central bank audit had spotted problems 11 months earlier, he said, and the bank had tried to ring-fence them, without saying how. Why no action followed is unclear. Some Portuguese politicians want an inquiry into how Banco Espirito Santo slipped through supervision. Costa took no questions from reporters.
The bank had also sailed through European stress tests in 2009, 2010 and 2011. Those exams were run by an EU office with fewer powers than the European Central Bank, and they never convinced markets. Banco Espirito Santo passed all three and was the only major Portuguese bank that needed no public aid during the country’s bailout program.
Who pays
Shareholders and junior bondholders, including large companies such as Portugal Telecom, which held the bank’s commercial paper, will take the worst of the losses. The rescue money comes from a special fund created during the eurozone crisis. It is a loan, to be repaid with interest, and Costa said taxpayers will not foot the bill. Portugal does not have to raise taxes or ask the EU for more help.
Almost 5 billion euros still counts as a lot in one of the eurozone’s smaller economies. It is roughly the annual budget for the country’s schools and universities.
The EU’s Simon O’Connor, a spokesman for the economic and monetary affairs commissioner, called the bank a special case and said its problems are no sign of systemic weakness in the eurozone or in Portugal. Barclays analysts expect investors to “remain guarded about risks which could stem from latent problems in the (Portuguese) financial system.” The ECB is currently examining the books of more than 100 of the bloc’s top banks, with results due in October, and this scandal could undermine that effort.
