Novo Banco: government may bypass parliament
The Portuguese government may bypass the country’s parliament and recapitalise Novo Banco to cover the shortfall it has from losses incurred from its Spanish operations.
Budget rues allow the government to change the amount of expenditure released from the Resolution Fund that is set out in the State Budget.
Opposition MPs say that such a measure would go expressly against the will of parliament because the State Budget for 2021 has not foreseen any additional injection of funds into Novo Banco by the Resolution Fund, and the MPs would want such a measure put to the vote.
But even if the government bypasses parliament and Novo Banco gets the funds it needs to balance its books for 2020, there is still a considerable risk that the bank will remain in a precarious position in the future unless it either finds a buyer or is wholly nationalised. It currently has a debt of €1.3Bn. The bank is currently owned by the US vulture fund Lone Star.
The bank will request around €600 million from the Resolution Fund which is questioning part of the amount.
If it rejects the request, the bank’s capital ratio will be below 12%, the minimum defined as contingency capital which would result in Novo Banco being in non-compliance.
At a public commission into the Espírito Santo Group’s asset management – Novo Banco was created from the profitable assets of Banco Espírito Santo in 2014 which ended up being either insufficient or quite toxic – Vasco Pereira, a former director of the Bank of Portugal, told MPs that an internal memo about the move of Espírito Santo International (ESI) to Portugal, which had “gone missing for two years, had been discussed, but was inconsequential.
Heard at a parliamentary public inquiry into the losses recorded by Novo Banco, shortfalls being met by the Resolution Fund, Vasco Pereira, director of BoP supervision between 2011 and 2013 said that during the period in which he was in charge, regular weekly meetings were held in which the conclusions of reports were discussed.
He told MPs that regarding the note about the consolidation of GES (Grupo Espírito Santo) meaning combining the Portugal-based national arm (BES) and Luxembourg-based international investment arm (BEI), he said that he presumed that the memo “would have been and surely was” discussed and analysed at these meetings.
The entity involved was Espírito Santo International which was based in Luxembourg at the time.
As to the fact that the memo had not been followed for two years, Vasco Pereira admitted that there had been a failure on his part to not give adequate follow-up supervision, but stressed that this was of no real importance since it would not have been possible to transfer the headquarters of ESI to Portugal anyway.
At the hearing, an MP also informed that the BoP had (at the time) asked for exposure to BES and GES to be reduced, and that this was done through capital raise and not by directly reducing exposure. The MP pointed out “no-one knew if the capital was real or not,” since “it could have been injected into the company by the group itself.”
Vasco Pereira replied, “That’s true, but we shouldn’t generalise. The Bank of Portugal knew about a very significant percentage of the capital, and knew where they were regarding this. We are talking about 20% of the capital that could have been (secured) under these conditions,”
In other words, the failed bank had hidden the true extent of its exposure in a series of funds whose participations has been bought by the bank itself.
“There was no reduction (in exposure), there was an “apparent reduction” because it was hidden in funds bought by the bank itself. The memo says that BES was careful at the end of the quarter to transfer the funds to a non-consolidated entity so that they would “not show up as exposures”. “Is this or is this not a violation of the rules of the Bank of Portugal?” asked the MP.
“In substance, yes, in form, probably not,” replied Vasco Pereira.
Novo Banco presented losses of €1.3Bn for 2020. Many of these losses were inherited from Banco Espírito Santo which collapsed in 2014. The bank has been considered by experts to have been a lame duck since its creation in 2014 because of inadequate capitalisation and a rotten inheritance from BES.