The Bank of Portugal's governor, Carols Costa, (pictured) today announced the sale of 75% of Novo Banco to the US vulture fund, Lone Star, thus ending a process started in August 2014 when he created the ‘good bank’ as a resolution to the Banco Espírito Santo collapse.
Costa said that "the sale is another important step in stabilising the financial system." The sale also plays a big part in helping to asses the overall loss to the State from the original €4.9 billion bail-out subsided by taxpayers’ funds.
Costa referred to "the strengthening of the credibility of the banking sector through the successful outcome of an open, transparent, competitive and international process," which is his opinon of a process dogged by criticism of its management..
New owners, Lone Star, will not be able to distribute dividends at Novo Banco for five years to ensure that funds raised from any asset sales can be used to strengthen the bank’s capital, added Costa, with fingers crossed. The Resolution Fund later will be able to sell its 25% stake in Novo Banco in an effort to recoup some of its losses.
The sale remains dependent on obtaining the usual regulatory authorisations from the European Central Bank and the European Commission but with the prime minister being wheeled out this evening to face the press and take the flack, the deal is done and the US fund soon will own 75% of a large Portuguese bank for just €750 million up front - money that will not be credited to the Resolution Fund as it is needed for ‘recapitalisation,’ and a further €250 million 'within 3 years,' by which time anything might have happened.
"The sale, once completed, allows a significant reinforcement of the capital of Novo Banco and the entry of a shareholder who undertakes a medium to long-term commitment with the bank, endowed with the means necessary to execute a plan that guarantees, definitively, the full recovery in terms compatible with the decisive role it has in financing the national economy," said the ever-optimistic governor whose belief that Lone Star will make it a priority to lend money to Portuguese businesses would be impressive, if true.
Carlos Costa pointed out that the agreed conditions provide for "mechanisms to safeguard the interests of the Resolution Fund, the alignment of incentives and supervision, despite the limitations arising from the application of state aid rules," adding plenty more of these justifications as to what a great deal this is for everyone when in fact it is being referred to as the give-away of the decade.
Carlos Costa, who has managed to spend €25 million of taxpayers’ money on ‘advisory fees,’ during this process, also stated that the signing of the contract allows," the sales deadline set in the State's commitments to the European Commission to be fulfilled." This, at least, is a true representation of the facts.
Earlier in the day, Left Bloc leader Catarina Martins said that, selling the bank was a mistake. "We have lost billions of taxpayers’ euros in operations where the government basically gets caught up in failed private banks, injects public money and turning them in to private companies, losing national control over the financial system."
Prime Minister António Costa had to front the announcement this evening that 75% of Novo Banco had been sold, thus leaving the Finance Minister sidelined while the opposition still wants to know why, if the government all along had assured parliament that there would be no public guarantees in the sale of the New Bank, there now seems to be a deal done where the public are still involved in funding Novo Banco as the Resolution Fund is liable for further losses and further recapitalisation.
The PM differs in his definition of 'liability' and said the sale fulfilled a key criterion of not extending any state guarantees to the buyer and guarantees Novo Banco's future, adding that, "There is no direct or indirect impact on public accounts, nor any new costs to taxpayers." (Note the use of the word 'new')
According to the FT, “The resolution fund has already spent €4.9 billion on rescuing Novo Banco, €3.9 billion of which came from a State loan. The sale of a 75% stake to Lone Star in exchange for fresh capital means it will not recover any of this outlay from the deal. However, the government has ruled that banks will not have to make any extraordinary contributions beyond their regular payments to the resolution fund, giving them several decades to make up the shortfall.”
The Novo Banco sale process was complicated by a decision in 2015 by Carlos Costa to transfer €2 billion in bonds from Novo Banco back to the BES "bad bank", thus boosting Novo Banco's capital by removing this liability and stripping investors of any chance of getting their money back.
A group of bondholders including Goldman Sachs, Pimco and BlackRock, have challenged the decision in court and a good decision for these investors could hit the shiny new Novo Banco right where it hurts, unless of course the State has agreed to pay the bondholders' money from central funds if it loses the case, leaving Novo Banco clear of liability.
Today's sale is an inelegant solution, made more curious by the dismissal of recent cash offers for Novo Banco approaching the €3 billion mark, dismissed by Carlos Costa as bidders had not followed the rules that he had defined for the inflexible sales process.
The deal was not discussed in parliament so the PM can expect a hard ride over the next few days, both in the press and from MPs, many of whom have concluded that the PM's pledge of "no State guarantees" has been another broken promise on an ever-growing list.
