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Ripped-off Novo Banco bondholders may be compensated by Portugal's other banks

bankofportugal2The Bank of Portugal, having relaunched the sale of Novo Banco after plugging a hole in the bank’s finances by transferring €2 billion in bonds into the black hole of BES, has left open legal avenues for the ripped-off bondholders to be compensed from the Resolution Fund.

Last year, the Bank of Portugal failed to find a buyer at the right price for Novo Banco as not one company was inclined to pay the €4.9 billion needed to get the central bank’s governor Carlos Costa off the hook.

To tidy things up at Novo Banco, on December 29th, 2015, Costa took the highly controversial decision to transfer €2 billion in bonds back to Banco Espirito Santo rendering them close to worthless.

These bondholders, a mixture of individuals and huge international investment companies such as Pimco and Blackrock, have been up in arms ever since and have started looking at legal action to recover their money.

Portugal’s Finance Minister Mario Centeno commented that the government was "concerned" with the Bank of Portugal’s solution for Novo Banco's balance sheet but the repayment of bondholders from the Resolution Fund is equally controversial and shows the governor as out of control while cries for his head increase in volume.

The Resolution Fund may have to compensate the bondholders if their claim is upheld that they have been forced to suffer a higher loss than if the bonds had stayed at BES in the first place.

The bondholders may be due for compensation from the Resolution Fund, paid for by Portugal’s high street banks, as Article 145.ºH of the Legal Framework for Credit and Financial Institutions swings into play and if the bondholders can prove they are worse off as a result of Costa’s debt shuffling.

The audit company Deloitte was commissioned by the Bank of Portugal to assess the value of assets at the bust BES and it is likely to conclude that the Novo Banco bondholders would have suffered a lower loss if BES had entered into liquidation at the time of its resolution.

Bondholders also will be due compensation if the courts hold that the responsibility for the repayment of bonds is Novo Banco’s and not that of BES. In this case, the Resolution Fund also kicks in and pays out for any losses suffered.

If the Resolution Fund again has to be topped up by Portugal’s high street banks, this will affect their liquidity and strain their patience as they already paid out to capitalise Novo Banco when it was created from the BES train crash. Having to find up to a further €2 billion will not create harmony. 

However this is resolved, the evaporation of Novo Banco’s €2 billion in liabilities seems destined to remain off its balance sheet and the race again is on to find a buyer for the bank which previously was criticised by PWC for having “unquantifiable liabilities.”

The former Secretary of State for Transport and Communications, Sérgio Monteiro, has been hired at €25,000 a month by the Resolution Fund and the Bank of Portugal to front the sale process for Novo Banco.

It is unlikely that the minimum of €4.9 million will be bid for the bank, but any offer that yields enough to help replenish the Resolution Fund will be seen by Portugal’s remaining high street banks as a positive step.


-2 #2 Mildred 2016-01-21 09:10
As often helpfully pointed out by us expats - this is all avoidable Entirely a self made mess by the Portuguese elite.

As the rest of the EU faces economic stringency with crashing markets and investments; swarms of migrant refugees etc so Portugal must begin to face up to the reality - that it screwed up. It alone. And attempt the seemingly impossible - to learn from this.
-2 #1 Jeff Harris 2016-01-21 08:14
Todays Jornal de Noticias brings some global reality to all this nonsense. The major banks of the world like Barclays, Bank of America, Credit Suisse meeting in London (where else?) today to discuss solutions to the problems created by the Bank of Portugal's action and inaction with BES / Novo Banco.

At risk is some 18 billion euros - far more than the total that gets generally bandied about. An amount that Portugal's Resolution Fund could not begin to pay out on and which the Government itself cannot help pay without crashing even further its 2016 budget.

As often asked by expats - why does Portugal not even try to behave? Why is it hard wired to go in the opposite direction - what Wellington's Generals called 'repeatedly aiming to miss'? Even when trying to save their own country.