Banking sector Novo Banco jitters

The Portuguese parliament’s decision to block a €476 million cash transfer from the state-backed Resolution Fund has sent shivers through Portugal’s banking system.

The Resolution Fund, which Portugal’s former finance minister, Mário Centeno famously called ‘the worst resolution fund ever conceived in Europe,’ holds a 25% stake in the loss-making bank controlled by the US private equity firm Lone Star and has already injected almost €3Bn into it.
The 2017 sale contract calls for a total injection of up to €3.9Bn, if certain losses occur. But now, after the Portuguese Parliament has blocked the cash transfer to Novo Banco until an audit is carried out, the banking sector is concerned and has asked the Portuguese audit authority, the Tribunal de Contas to wave the cash through.
Its argument to the Tribunal de Contas is that putting Novo Banco is an impossible financial situation would have a potentially negative impact on the credibility of both Portugal and its banking sector overseas, with a possible knock-on effect on the Government’s ability to raise financing on the international money markets through bond auctions at zero interest.
“Of course, the decision (by parliament) worries us because if the State goes back on its contractual commitment that it signed, then it sends out a bad signal on the creditworthiness of the country overseas,” a source within a private bank told the newspaper Público.
The block on the transfer of funds to Novo Banco was the main blot on the deliberations held in the Portuguese parliament this week which on Thursday 26 November (Yesterday) passed the minority Socialist government’s 2021 budget which will see a sharp rise in public spending to kick-start growth in Portugal’s economy which has been devastated by the Coronavirus pandemic, and will include increasing subsidies to companies and pensions.