Parliament blocks €476 million for Novo Banco

The Portuguese parliament has voted to cancel a €476 million transfer from the bank’s Resolution Fund to Novo Banco. So what are the options now?

The decision effectively calls into question the contract made between the bank and the US capital venture fund Lone Star which injected over €1Bn into the cash-strapped bank in 2017.
The decision by the left-wing parties Bloco Esquerda and Portuguese Communist Party (PCP), PAN (animals rights party) and main opposition party PSD means that the bank’s future is now in unknown territory.
It also means that the Government will now have to resort to the administrative courts to try to overturn the decision by parliament over the cash transfer.
The administrative court may issue an order in which the Resolution Fund will have to comply with the contract. Failing that, the Government could force through the cash injection by provisional voting or by transfers within the budget.
There are a number of possible scenarios on the table for Novo Banco: 1) The Constitutional Court could rule that blocking the cash transfer is illegal because of the State’s commitment to meet its contract with Lone Star, also arguing that the bank still has the right to use the remaining €900 million in the Resolution Fund. 2) The judges at the Constitutional Court could make a stay on its decision until May, which would still mean the block would remain in force until then. 3) The court could confirm the legality of the bank’s management and await the results of the exhaustive audit into the bank demanded by parliament and which will decide if there were conflicts of interest in the sales of bank assets, as well as analysing the sales of toxic assets (Non-Performing Loans). If the court rules that the bank’s actions were legal, parliament would have to approve an amended budget, and the money would have to be transferred. 4) If the final results of the audit are not ready by the end of April, parliament will not be able to give the green light to an amended budget and the State would effectively be in non-compliance of the contract with Lone Star, paving the way for further court cases.
5) If the national audit court Tribunal de Contas, which is undertaking the audit, does present its results within the deadline, but finds irregularities in the way Novo Banco is being managed, i.e, sold assets on the cheap which harmed the public interest, it would mean that the bank had received funds improperly from the Resolution Fund then the fund, which is funded by the Portuguese banks, could demand the money back which in turn would mean that Lone Star would lose the money that it had received improperly and which could again lead to legal action brought by Lone Star.

The hundred dollar question would then be that if Novo Banco does not get further funding from the Resolution Fund, would the Government allow the bank to A) collapse, B) be wholly renationalised C) close the bank and absorb accounts into the State-owned bank Caixa Geral de Depósitos, or D) undertake a shot-gun sale providing that a buyer can even be found at an acceptable price?