Portugal throws bad money after bad at Novo Banco
The Portuguese state and its other lenders remain exposed to Novo Banco’s losses, even after the bank's sale. Investors might complain about their own losses, but the real scandal is the public money that's still pouring into the country's banks.
Novo Banco last Wednesday released its first set of results since being sold to US private equity firm Lone Star last autumn.
It made a net loss of €1.4bn, driven by net impairments and provisions of €2.1bn, up 50% on 2016.
On the face of it, the news should not be too relevant for the Portuguese government or the country’s other banks.
After all, the sale to Lone Star was meant to mark the end of a drawn-out procedure, which started when Novo Banco emerged as the “good bank” from Banco Espírito Santo’s division into good and bad banks in 2014.
But neither group has washed its hands of the troubled lender. Novo Banco remains 25% owned by the Portuguese Resolution Fund. This fund is owned by Portugal’s other banks, but can access loans from the state.
And the sale included a contingent capital agreement, whereby the resolution fund must compensate the bank to the tune of up to €3.89bn for losses recognised on assets, if the bank’s capital ratio falls under a certain level.
This agreement means that on the back of Novo Banco’s 2017 performance, the resolution fund has had to cough up €791.7m in compensation, and up to €450m of this will come from a state loan.
Drum of grievance
It is the latest of many disappointments for stakeholders in one of Europe’s most troubled lenders.
After the good bank-bad bank split, Novo Banco turned out to be not so good after all, and five out of 52 senior bonds were transferred back to BES. Then, for the sale to take place, it had to complete a liability management exercise, imposing further losses on bondholders.
Angry investors, such as BlackRock and Pimco, which were hit by that decision to transfer bonds back to BES, have formed a collective, the Novo Note group.
They argue that the transfer broke with the idea of equal treatment between creditors. After the results announcement, the group was quick to bang its familiar drum of grievance.
“The unprecedented losses at Novo Banco and the need for Portuguese taxpayers to inject an additional €800m are further examples of how poorly the Bank of Portugal has managed the resolution of Banco Espirito Santo and the sale of Novo Banco,” it said.
“As with the unlawful decision to retransfer certain bonds from Novo Banco to BES in 2015, the Portuguese central bank failed to engage with all stakeholders while taking decisions that imposed undue costs on taxpayers and destabilized the country’s banking system,” it added.
The group, which through its mail distribution, website and Twitter account looks to bring a more PR-friendly approach to a dense legal dispute, may well have reason to feel aggrieved.
But its professed sympathy towards Portuguese citizens looks just a tad insincere, given the “mutually beneficial solution” it is seeking from authorities presumably involves some sort of compensation from those citizens.
And putting the technicalities aside, the whole aim of European bank debt regulation has been about making institutional senior bondholders subordinate to other creditors. It's not a secret — it has been part of the explicit design of policy since at least 2015.
Portugal has little bullying power in capital markets: its GDP is a fraction of the size of the assets under management of BlackRock or Pimco.
Its dilemma is whether to win back the favour of investors through a sweetener, which could involve doling out yet more public money on the Novo Banco affair, or risk market ignominy just as the ECB tapers asset purchases.
Public debt incurred by the government’s measures to support the financial system between 2007-2017 amounts to 12.3% of GDP, according to the Bank of Portugal. Last year this included the €3.9bn state recapitalisation of Caixa Geral de Depósitos, which pushed up the country’s deficit by 2% of GDP.
Up until its sale, investors in Novo Banco have had a hard time.
But the real losers have been the Portuguese public. For all the European rhetoric on protecting the public purse, they have continued to stump up for the sector’s failings.