"The Cost Is Very High": Portugal Taxpayers Face €3 Billion Loss After Second Bank Bailout In 2 Years

Back in August of 2014, Portugal had an idea. 

Lisbon would use some €5 billion from the country’s Resolution Fund to shore up (read: bailout) Portugal’s second largest bank by assets, Banco Espirito Santo. The idea, basically, was to sell off Novo Banco SA (the "good bank" that was spun out of BES) in relatively short order and use the proceeds to pay back the Resolution Fun. That way, the cost to taxpayers would be zero.

You didn’t have to be a financial wizard or a fortune teller to predict what was likely to happen next.

Unsurprisingly, the auction process didn’t go so well. As we recounted in September, there were any number of reasons why Portugal had trouble selling Novo, not the least of which was that two potential bidders - Anbang Insurance Group and Fosun International which, you’re reminded, is run by the recently “disappeared” Chinese Warren Buffett - suddenly became far more risk-averse in the wake of the financial market turmoil in China. Talks with US PE (Apollo specifically) also went south, presumably because no one knows if this "good" bank will actually turn out to need more capital going forward given that NPLs sit at something like 20% while the H1 loss totaled €250 million thanks to higher provisioning for said NPLs. Now, the auction process has been mothballed and will restart in January.

This matters because if the bank can’t be sold, the cost of the bailout ends up being tacked onto Lisbon’s budget. The impact is substantial. In September, when the effort to sell Novo collapsed, the government restated its 2014 deficit which, after accounting for the bailout, ballooned to 7.2% of GDP from 4.5%. Portugal will tell you that this is only “temporary,” but let’s face it, if they haven’t managed to sell it by now, then one has to believe the prospects are grim - at least in terms of fetching anything that looks like a decent price.

Well don’t look now, but Portugal’s seventh-largest bank, Banco Internacional do Funchal, now needs a bailout too. Banif (as it’s known) will be split into a “good” and “bad” bank, and its “healthy” assets will be sold to Banco Santander for €150 million. The government will inject up to €2.2 billion the European Commission said on Monday, to cover "future contingencies." 

Hilariously, the bailout was necessary because the bank was unable to repay a previous government cash injection. “The government injected €1.1 billion of fresh capital into the lender in January 2013 to allow it to meet minimum capital thresholds imposed by the banking regulator,” WSJ writes. For its trouble, Lisbon got a 60% stake in the bank and several hundred million worth of CoCos which the bank missed a payment on last year. “That,” WSJ goes on to note, “triggered close scrutiny by the European Commission, which opened an investigation into the legality of the state aid.” 

"The commission had said that Banif’s restructuring plan might not be enough to allow the bank to repay the state," Bloomberg adds. "The Bank of Portugal said in the statement on Sunday that a 'probable' decision from the commission declaring the state aid illegal would create a shortage of capital at the bank."

The "problem" had to be resolved urgently because if the government hadn't figured it out by January, senior bondholders and depositors with more than €100,000 in the bank would have been at risk under new EU rules governing bank resolutions. 

Needless to say, this isn't good for Portugal's books. "Finance Minister Mario Centeno said the cash injection would have an impact on this year's budget deficit equivalent to over 1 percentage point of GDP," Reuters notes.

So between the bailouts for Banif and Novo Banco, Lisbon has managed to bascially double the country's budget deficit. But don't worry, the money spent on the bailouts actually doesn't count. Here's Retuers again: "Brussels should not factor in that aid when considering its 3 percent threshold for excessive deficits, Centeno said." 

Of course not. Everything is always fine if you just ignore all the bad stuff.

The Left Bloc which, along with the Communists, helped new PM Antonio Costa and the Socialists take power early last month after October's inconclusive election, blames the Passos Coelho government for procrastinating in order to avoid taking a hit on the budget. "The Bank of Portugal has once again failed to live up to its responsibilities. We believe that Gov. Carlos Costa does not have the minimum conditions to stay in his position," one senior Left Bloc MP said. 

"Last week, Banif Chief Executive Jorge Tome said the previous government delayed looking for a new private investor to take over its majority stake because it didn’t want the process to clash with the sale of Novo Banco," WSJ adds. 

As for PM Costa, he concedes that Portuguese taxpayers are taking a rather substantial hit on this one. "The costs of the bailout are very high for taxpayers," he said, adding that the resolution was the only way to protect depositors and avoid triggering some kind of dramatic meltdown.  

Amusingly, implementing the resolution will cost more than half a billion euros. Transfering the bad assets to a separate vehicle will apparently cost taxpayers another €422 million, and on top of that, the state will cover any “potential recent changes of values” on the assets sold to Santander (which incidentally had considered bidding for Novo Banco). 

So just to be clear: taxpayers not only have to pay €2.2 billion to bail Banif out, they also have to pay €422 million for the privilege of paying that €2.2 billion and then they'll need to backstop any M2M losses that Santander finds once it goes through its new assets with a fine-tooth comb. And all of this for a lender which received €1.1 billion in taxpayer money not even two years ago.

Additionally, it's worth noting that Brussels isn't likely to be as forgiving towards Costa and his leftist coalition as it was towards to the Coelho government, which means that no one is going to be pleased with a deficit that's nearly three times larger than the EU-mandated target.

If Centeno is wrong and Brussels does factor the bailouts in when considering Portugal's excessive deficit (or even if they don't do so openly but decide behind closed doors to give Lisbon less leeway should the deficit minus the bailouts remain above 3%), the troika could push back, demanding still more austerity. That would set the stage for a clash between Lisbon and Brussels, an event we've been predicting since October's elections. 

As for Portuguese taxpayers, you're reminded that there's "power" in "believing"...

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Full statement from Bank of Portugal

The national authorities ¬- Government and Banco de Portugal - have decided today the sale of the business of Banif – Banco Internacional do Funchal, S.A. (Banif) and of most of its assets and liabilities to Banco Santander Totta by the amount of € 150 million. The impositions of the European institutions and the unviability of Banif’s voluntary sale led to the need for the sale carried out today to be decided in the context of a resolution tool.

This solution guarantees the total protection of households and companies’ savings entrusted to Banif, both deposits and senior bonds, as well as the financing of the economy and the continuity of the financial services provided by this institution up until now. Thus, the normal functioning of the services provided so far by the institution will be maintained. The customers will be able to perform all operations as usual both at the branches and through electronic channels. Banif’s customers will become Banco Santander Totta’s customers and Banif’s branches will become branches of Banco Santander Totta. 

This solution is also the one that best protects the stability of the Portuguese financial system.

This operation involves estimated public support to the amount of € 2,255 million intended to cover future contingencies, of which € 489 million by the Resolution Fund and € 1,766 million directly by the State, as a result of the options agreed between the Portuguese authorities, European bodies and Banco Santander Totta, to define the perimeter of the assets and liabilities to be sold.

I. Background

Banif is the seventh largest Portuguese banking group. In June 2015, its assets totalled € 12,788 million (approximately 7% of GDP) and its deposits totalled € 6,271 million. Banif is the market leader in the Azores and Madeira, with market shares of 37% in deposits and 31% in loans in the Azores and of 36% and 23% in Madeira respectively.

In January 2013 Banif was recapitalised by the Portuguese State in the amount of € 1,100 million (€ 700 million under the form of special shares and € 400 million in hybrid instruments). The recapitalisation plan also included a capital increase by private investors in the amount of € 450 million, which was concluded in June 2014. Since then, Banif reimbursed the State with € 275 million of hybrid instruments, but was not able to reimburse the € 125 million tranche that matured in December 2014.

The public recapitalisation was temporarily approved by the European Commission (DG-COMP), with final approval being subject to the presentation of a restructuring plan for Banif. Between April 2013 and October 2014, Banif submitted to DG-COMP a number of versions of the Restructuring Plan. However, the versions were not approved by DG-COMP, which on 24 July 2015, communicated its decision to open an in-depth investigation process of the State aid to Banif.

In the period following the recapitalisation of Banif with public funds, Banco de Portugal, as the prudential supervisory authority (a competence that since November 2014 has been exercised by the Single Supervisory Mechanism) monitored the institution very closely.

In that period, there were several deviations from the assumptions considered in Banif’s Recapitalisation Plan. In terms of positive deviations, there was a reduction in structure costs and, until the end of 2014, an improvement in the liquidity position with the diversification of funding sources and the stability of the depositors’ base.

However, the absence of an approved restructuring plan, worsened by a less favourable economic environment, led to significant negative deviations of Banif’s results from the projected amounts. In spite of these difficulties, Banif always maintained its prudential ratios above the legal thresholds.

II. Sale and resolution

In the wake of the in-depth investigation procedure opened by the European Commission on the State aid received by Banif, and considering the possibility that this aid could be considered illegal and therefore its reimbursement would be required, the shareholders and members of the Board of Directors of Banif have started the process for the sale of the institution.

On 19 December the Ministry of Finance informed Banco de Portugal that it had not been possible to sell Banif's assets and liabilities through a voluntary sale process, since all the proposals submitted by potential buyers implied additional State aid. This determined that the sale would have to be made in the context of a resolution.


the consequences of the possibility that the State aid to Banif could be declared illegal by the European Commission, which would create a very serious capital shortage;

the position of the European bodies that the sale of Banif with recourse to State aid would only be viable in the context of a resolution;

the impact of frustrated expectations related to the voluntary sale on Banif's liquidity situation - which had deteriorated rapidly in the past days - and the resulting risks for the maintenance of its regular payment flows and for meeting its obligations towards the customers;

the national authorities have decided to sell Banif to Banco Santander Totta for the amount of €150 million, in the framework of a resolution tool. 

According to this decision, the overall activity of Banif will be transferred to Banco Santander Totta, with the exception of problematic assets which will be transferred to an asset management vehicle. Banif will maintain a very limited set of assets that will be wound up in the future, as well as the shareholders' positions, subordinated credit and related entities.

The adjustments associated with the definition of the perimeter agreed between the Portuguese authorities, European bodies and Banco Santander Totta involve an estimated public support to the amount of € 2,255 million intended to cover future contingencies, of which € 489million by the Resolution Fund and € 1,766 million directly by the State.

Banco de Portugal considers that, in view of the circumstances and restrictions imposed, the sale of Banif's business is the solution that better safeguards the stability of the national financial system and protects households' and companies' savings, as well as the financing to the economy.

Lisbon, 20 December 2015