Portugal Central Bank Bails Out Banco Espiritu Santo

I previously noted of the banking turmoil happening in Portugal: Add to Bulgaria’s woes has been the recent hubbub over Portugal’s largest listed lender the Banco Espiritu Santo (BES) which just filed for creditor protection following the company’s newly discovered financial irregularities and the failure to make payments to creditors. Following March highs, Portugal’s stock market  plummeted into the bear market as the BES saga unraveled. 

Well governments (like China) are back into a frantic bailout mode. The Portuguese Central Bank reportedly announced a $6.6 billion rescue of Banco Espiritu Santo (BES) 

From Bloomberg:

Portugal’s central bank took control of Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses.

The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright. The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale. Espirito Santo shareholders and junior bondholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, according to a central bank statement yesterday.

“Shareholders, subordinated debt holders as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee,” the Finance Ministry said in a statement.

Banco Espirito Santo has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family and ordered the lender to raise capital. Bank of Portugal Governor Carlos Costa had sought to find private investors to inject the cash, and said government funds would only be a last resort. The Portuguese government has about 6.4 billion euros remaining from its European Union-led bailout in 2011 to fund the capital injection.

So the Portugal government’s BES bailout will leave little contingent funds for any other potential financial instability.

Chart from Reuters

The sustained meltdown in BES shares has prompted the Portuguese government to suspend trading.

The BES ruckus has even spilled over to Portugal’s major equity benchmark the P-20, which has been hammered, now back to a bear market 

Here is the timeline of the BES saga.

The BES episode is a reminder that, despite previously rising stocks and today’s bail out, all have not well in the Eurozone.