Ex-Bank of Portugal governor compares Novo Banco to a fruit basket with partially rotten fruit
A former governor of the Bank of Portugal, Carlos Costa, has likened Novo Banco to a basket of partially rotten fruit.
Addressing a parliamentary hearing this week into alleged mismanagement at Novo Banco and what went wrong at its predecessor Banco Espírito Santo, Costa said that Novo Banco’s current problems lie with the “disastrous financial loan operations” that the bank made before 2014.
The banker said that Portugal would have had to shoulder a much greater cost if the Bank of Portugal had not acted in the way it did over the sale of Novo Banco in 2017.
He reminded the public inquiry of the financial state in which the bank had been at that time and compared it to “a basket of fruit” in which some was “rotten.”
“The question is always the same: You are selling a basket of fruit which is partially rotten. You can’t count on the benevolence or generosity of the buyer to buy all of the fruit as though it was all good quality,” said Carlos Costa at the inquiry on Monday.
According to the ex-governor “as a yardstick to measure the bank’s worth and if the sale had been well or badly handled”, Costa said the cost of not selling and letting all of the fruit go rotten had to be taken into consideration.
In the case of Novo Banco, Carlos Costa said it was a question of selling the entire fruit basket at a lower price, including the bad fruit which were the bank’s non-productive assets, such as Non-Performing Loans, and whose liabilities formed part of the contingent capital agreement created when the bank was sold to the US equity fund Lone Star which bought 75% of the bank in exchange for a €1Bn injection into the bank and a continent capital mechanism of €3.89Bn to cover registered losses from toxic assets.
Carlos Costa argued in favour of the sale of Novo Banco, arguing that the alternative of not acting would have had a much higher cost for Portugal. “Not acting would have had implications on the economy, the confidence of the depositors and capital mobility,” said the man who retired from being Portugal’s central bank governor in July to be replaced by Mário Centeno.
He also made it clear that the Bank of Portugal had a “limited time to sell Novo Banco with a sword of Damocles over its head, which meant the alternative being liquidation and a €20-25Bn hit for the Bank of Portugal since a buyer would only buy the bank if the toxic assets were underwritten by the Bank of Portugal.
Carlos Costa said that the losses at Novo Banco were “not caused from the sale” but before, “between 2010 and 2014,” at the time when BES made disastrous loans, giving as examples the borrowers Moniz da Maia (business tycoon), Gama Leão (a construction entrepreneur) and Luís Filipe Vieira (a football magnate).
Novo Banco is expected to lose more than €100 million in 2021 even if the Resolution Fund delivers a cheque for €430 million this year.