The Bank of Portugal yesterday approved the transfer of €1.985 in bonds from Novo Banco back to Banco Espírito Santo to boost Novo Banco's balance sheet.
Novo Banco received €4.9 billion when it was set up in the wake of the BES collapse in August 2014 and this devious financial move means Novo Banco suddenly is nearly €2 billion better off and now fit for sale.
The European Central Bank was not happy to spot a €1.4 billion hole in Novo Banco’s capital this autumn and commented on this week's move "From this measure, in net terms, there will be a positive impact on Novo Banco's capital of about €1.985 billion."
At the time of the BES rescue, its 'good assets' were transferred to Novo Banco. The dodgy liabilities stayed with BES which is being wound up over time but the bonds represented a liability to investors and Novo Banco wanted to get rid of such inconveniences.
This transfer of bonds magically will disappear from Novo Banco’s balance sheet and reappear in the bombed out shell of BES. Problem solved.
The Bank of Portugal is delighted at this wheeze as it makes Novo Banco a more attractive purchase when it is up for sale again, more attractive by €1.985 billion, as Novo Banco now meets the capital requirements set by the European Central Bank.
The bonds transfer, which was gleefully approved by the Bank of Portugal calling it “purely an accounting measure”, means that "Novo Banco is now in a condition to meet the capital requirements that resulted from the regulator's recent comprehensive assessment stress test."
The government is happy as the financial pain will be felt by institutions rather than members of the public; hence it is not much of a vote loser. In fact there are private investors involved who have lost the lot, a fact the Bank of Portugal has tried to gloss over.
However, and as expected, investors will challenge this financial chicanery as being completely illegal.
The Association of Analysts and Investors in the Capital Market sent up a warning flare that court action is inevitable.
Octavio Viana of the Association said that in his members’ view the move was “clearly illegal because it violates very important principles: the equal treatment of holders of these categories of securities,” calling the move "manifestly illegal."
