Portugal ready to bail out crisis-hit bank BES

Portugal is ready to bail out the Banco Espirito Santo (BES) to prevent a catastrophic run on its banks that could plunge its fragile economy further into crisis.

The recapitalisation plan could be announced as early as Sunday evening after trading in the country’s biggest private bank was suspended by the Lisbon stock exchange on Friday after its shares went into freefall.

At one stage the bank’s market value sank by one billion euros in a minute after it reported first-half losses of 3.57 billion euros ($4.78 billion) on Wednesday, the worst ever recorded in the eurozone country.

“With shares plummeting it is up to the state to lift doubts about the solvency of the bank,” analyst Pedro Lino of Dif Broker told AFP.

The bank was plunged into turmoil last month by suspicions that its holding company, the family-run Espirito Santo International (ESI), covered up a 1.3-billion-euro hole in its accounts.

Then the bank’s veteran head Ricardo Salgado was forced out before being arrested last Thursday in connection with money laundering allegations.

Fears that the bank’s collapse could have serious consequences for Portugal, which only exited a 77-billion-euro ($106 billion) EU-IMF rescue programme in May, has worried global markets as questions resurfaced over eurozone debt.

The cash injection from the state is designed to stop savers pulling any more money out of the bank, and to assure them their money is safe, analysts said.

– ‘Cannot reason with panic’ –

“We have seen clients withdrawing their money from BES for a while now. There’s no reason for it, but you cannot reason with panic,” Joao Cesar das Neves, an economics professor at the Catholic University of Lisbon, told AFP.

Under new European rules shareholders and bond holders will have to contribute to any bailout before the state puts in taxpayers’ money.

To stop more panic selling, the Portuguese authorities plan to withdraw BES from the stock market on Monday, the Lisbon newspaper Diario de Noticias said on Saturday.

They are also considering setting up a so-called bad bank to handle and get rid of its toxic assets, it reported.

Saleable assets will then be handed over to the Resolution Fund set up by Portugal’s banks as a part of the conditions for the 2012 bailout by the troika of the EU, IMF and European Central Bank (ECB).

It is from this fund of 6.4 billion euros ($8.5 billion) that the government plans to refloat BES, analysts believe.

Under this scenario, the bad bank will remain in the hands of the present shareholders, who include France’s Credit Agricole.

Once it has got rid of its bad or riskier loans, BES will have a better chance of attracting private capital and thus eventually returning to the stock market.

This solution, which was reportedly still being negotiated on Sunday between Portugal’s ministry of finance, the Bank of Portugal and the new BES management, must also be approved by Brussels.

This is the first test of the new transitionary rules before European banking union is put in place in 2016, when all banks will have to submit to supervision by the ECB to prevent taxpayers having to pick the bill for crashes.