When a week ago, the third and final Banco Espirito Santo HoldCo went bankrupt [4]...
[5]
... we knew it was only a matter of time. Sure enough, following Friday's record collapse in the stock price of Portugal's mega bank after even Goldman decided it had enough and pulled the plug [6]on an equity investment it had made just three short weeks earlier (apparently with zero Due Diligence) following massive losses, and whose failure even Portugal's president Silva finally admitted [7]could be a systemic event, the local Diario Economic [8]reports that Banco Espirito Santo is about to be nationalized, i.e. bailed out.
The details from Bloomberg, about the transaction that will wipe out the existing equity and replace it with 100% ownership by the Resolution Fund:
- Portugal may use the Resolution Fund to recapitalize Banco Espirito Santo, Diario Economico reports, citing unidentified people linked to the process.
- Resolution Fund may inject more than €3 billion
- A “bad bank” may be created for the toxic assets of the credit portfolio
- Solution aims to rescue Banco Espirito Santo without spending taxpayers’ money, and is being prepared by the government and the Bank of Portugal
- From Aug. 4, Banco Espirito Santo will leave the stock market and will be 100% owned by the Resolution Fund, an entity created in 2012 and financed by Portuguese banks and by revenue from the special contribution that the banking sector pays the Portuguese state
- Resolution Fund will have to be given enough resources to capitalize Banco Espirito Santo, and according to legislation this can be done through a state loan or through a new special contribution imposed on the 84 institutions that contribute to the fund
- Part of the €6.4b that the Portuguese state still has available in the bank recapitalization facility that was included in Portugal’s bailout program may also be used to give the Resolution Fund the necessary resources to capitalize Banco Espirito Santo
- Portuguese authorities’ plans predict that the bank will be sold in the stock market within six months, with the proceeds from the sale being used to repay the Resolution Fund
So Portugal's "less insolvent" smaller banks will fund the bailout facility to rescue the nation's most insolvent mega bank. What can possibly go wrong...
Incidentally, the most fun we had was the part where they said no taxpayer money (read German) would be used to bail out yet another insolvent European bank.
So much for Europe's self-sustaining recovery in which no bank will be henceforth rescued.
That said, expect some combination of bail-out with bail-in elements, meaning the sub bonds are most likely about to be wiped out as well.
[9]
The only question is what happens to the seniors.