Portuguese Banks

Espirito Santo Crisis Reveals Regulator Missteps, But New Rules Limit Tab to Consumers

A man passing a Banco Espirito Santo (BES) branch in Lisbon, Portugal. Source: DPA
A man passing a Banco Espirito Santo (BES) branch in Lisbon, Portugal.
  • Why it matters

    Why it matters

    Steep losses revealed by Portugal’s second largest bank show monitoring by European and Portuguese regulators of the country’s banks has failed. New regulations should limit losses to taxpayers.

  • Facts

    Facts

    • Banco Espírito Santo’s market value has declined by half since May.
    • Moody’s downgraded Espírito Santo Financial Group’s debt last month.
    • One publication estimates investors could lose 70 percent in a bank restructuring.
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    Audio

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Two conclusions can be drawn from the deep crisis facing Portuguese financial group Espírito Santo and the bank of the same name.

First, monitoring by Portuguese banking regulators and the troika of the European Union, International Monetary Fund, and European Central Bank has failed. This is undermining trust in the country’s entire financial sector.

Second, there is also a positive effect. The bailout packages of recent years and new rules for bailing out banks are opening ways for the Portuguese government to minimize costs to taxpayers. They also lower the risk of state insolvency spreading throughout the 18-country euro zone.

For three years, until just a few weeks ago, Portugal was under the wings of the troika of international organizations, which were trying to help stabilize its failing economy. During this time, bank balances were examined and some institutions recapitalized. Banco Espírito Santo – which last week reported crippling losses and now needs some €3 billion ($4.03 billion) in fresh capital – had been pronounced healthy. Just a few days ago, Portuguese banking authorities declared that the country’s second largest bank had sufficient capital to handle its problems.

At least for now, Portugal’s taxpayers can hope that the Banco Espírito Santo crisis won’t cost them too much.

It was a spectacular error, which raises the question of whether the ECB’s ongoing balance sheet examination and stress tests won’t turn up a few more rotten eggs in the Portuguese banking system. As a result, other major Portuguese banks have suffered heavy losses on stock markets. It means the crisis at Banco Espírito Santo will delay recovery in the financial sector and put off badly needed loans to the country’s languishing middle-class.

Remarkably, the crisis is having little effect on Portuguese government bonds. Even last Friday, when it was becoming clear that Banco Espírito Santo would not be able to solve its looming deficit with the help of private investors as promised, the yield of a 10-year benchmark bond climbed only a few base points to 3.70 percent. This is far from the crisis level barely a year ago when the yield stood at over 7 percent.

Investors know that €6 billion ($8.06 billion) from E. U. bailout loans are resting in Portugal’s state coffers and are earmarked for bank bailouts. They also know that a bank bailout solely at the cost of the taxpayers, as was the case in 2008 with the failed Portuguese bank, Banco Português de Negócios, is no longer possible. New aid regulations for banks require losses to be shared by stockholders and secondary creditors. This explains the collapse of Banco Espírito Santo on the stock market.

Also, a bank rescue fund was set up in Portugal in 2012 that is fed only by payments from the financial institution and can only temporarily be filled with state credits.

So, at least for now, Portugal’s taxpayers can hope that the Banco Espírito Santo crisis won’t cost them too much.

Anne Grüttner is a correspondent for Handelsblatt in Spain and Portugal. She can be reached at gruettner@handelsblatt.com .

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