Last December 30, creditors in Portugal's Novo Banco received a very unpleasant parting present to 2015: a bail-in, which sent their bonds crashing from just shy of par to barely above worthless.
As a reminder, Novo Banco was the “good” bank forged from the ashes of Banco Espirito Santo which had to be bailed out by the state in August of 2014. The idea was to sell Novo Banco to pay for the cost of the bailout, but the auction process eventually floundered amid turmoil in Chinese markets (at least two of the potential bidders were Chinese) and uncertainty about whether this “good” bank would in fact need more capital given the elevated level of NPLs already on its books.
Then last November, the ECB told Novo it would need to raise some €1.4 billion in fresh capital which the bank initially said would come from asset sales. A little over a month later, Portugal’s central bank essentially just gave up. On December 29, the bank announced it was transferring €2 billion in NB senior notes back to Banco Espirito Santo which, like a ghost skyscraper in China, is set for demolition. In other words, Novo Banco plugged the €1.4 billion hole by essentially declaring €2 billion in bonds null and void.
Fast forward six months later, and Novo Banco is set to be the gift that keeps on giving... even more terrible news.
According to the FT, Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for even more heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco.
Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break-up or liquidation.
Maybe. Or maybe we we will the first case of a "bad bank squared" - it would be hardly surprising considering Italy is about to bail out its already repeatedly bailed out banking sector... again.
According to the FT, the sale of Novo Banco is among critical decisions that will shortly determine the future shape of Portugal’s banking industry, which the International Monetary Fund has linked with the problems facing Italian lenders as among potential risks to global growth.
It's not just the tragic ghost of Nova Banco that is haunting Portugal, and the rest of Europe. Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state-owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn. The Bank of Portugal and Lisbon’s eight-month-old “anti-austerity” government are also calling for a “systemic solution” to deal with more than €30bn in bad debts and problem assets, adding to other calls for public bailouts of troubled EU banks.
But wait, there's more.
In a recent report, Barclays estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was bringing the country under “close market scrutiny”.
In other words just like Italy "unexpectedly needs a €50 billion (to start) bailout, "suddenly" Portugal also seems to need a €7.5 billion (to start) bailout.
As the FT adds, "investors fear the capital needs of banks could further burden the public finances of a struggling country already facing potential EU sanctions for failing to meet deficit targets."
Actually, judging by historical precedent, "fear" is not the right word for what investors feel when it comes to taxpayer bailouts.
“Some banks are in need of a large capital injection,” said Antonio Garcia Pascual, chief European economist with Barclays. “This means any material losses from the sale of Novo Banco could end up having to be met by the sovereign, as the capacity of Portuguese banks to absorb them is rather limited.” And when Antonio says "the sovereign", he means taxpayers.
Meanwhile, Eduardo Stock da Cunha, Novo Banco’s outgoing chief executive, is already setting the stage for the doomsday scenario should his bank not get taxpayer funding, and has warned of potential big losses on the sale, drawing a comparison with Millennium BCP, Portugal’s largest listed bank, whose shares have dropped more than 60 per cent this year and which has a market value of just over €1bn.
“Portugal has to be realistic about Novo Banco when BCP is trading at a price/book value of around 0.4 and southern European banks in general at 0.5,” said a Lisbon banking analyst.
In other words, while Italy debates whether or not to be brave enough to ask Germany to greenlight a much needed €50 billion bailout, little Portugal may steal all its glory... and in the process unleash the latest - if not last - wave of taxpayer bailouts across Europe all over again.