In my latest post at Pieria, I took a hard look at the half-year results of Portugal’s distressed Banco Espirito Santo. They are pretty grim reading. No, they are worse than that. They read like an instruction manual for how to rip off a bank. It’s no surprise that the losses are appalling.
But now it seems that Banco Espirito Santo is to be bailed out by the Portuguese government. The rescue plan was announced by the Bank of Portugal late in the evening of 3rd August, and the European Commission confirmed that it complied with existing state aid rules.
The Bank of Portugal’s statement describes the dramatic events that led to the decision to rescue BES (my emphasis):
On July 30, Banco EspÃrito Santo, SA announced losses which greatly exceeded those anticipated from the information previously provided by Banco EspÃrito Santo, SA and its external auditors. Results released on July 30 reflect management acts seriously prejudicial to the interests of Banco EspÃrito Santo, SA and infringement of Bank of Portugal decisions forbidding increased exposure to other entities of the EspÃrito Santo Group. These events took place during the tenure of the previous administration of Banco EspÃrito Santo, SA. Management acts at a time when the replacement of the previous administration had already been announced translated into an additional loss of the order of €1.5 billion compared to that expected from the statement of Banco EspÃrito Santo, SA to the market on July 10 . This had several consequences:
1) placed Banco EspÃrito Santo, SA in a position of non-compliance with minimum solvency ratios in force (Common Equity Tier 1 ratio of 5 percent, three percentage points below the regulatory minimum);
2) determined a decision to suspend access by Banco EspÃrito Santo, SA to monetary policy operations and therefore, the liquidity of the Eurosystem;
3) generated a growing pressure on the Treasury of Banco EspÃrito Santo, SA;
4) worsened the public perception of Banco EspÃrito Santo, SA, as evidenced by the strongly negative performance of the respective titles, injurious situation for the confidence of depositors. This negative public perception led to the suspension of transactions on the afternoon of Friday, August 1, at the risk of infecting the perception relation to other institutions of the Portuguese banking system;
5) worsened the uncertainty about the balance of Banco EspÃrito Santo, SA, invalidating a privately funded solution in a short time.
This framework created continuity problems for Banco EspÃrito Santo, SA activities. Given the importance of the institution in the whole banking system and the financing of the economy, these problems jeopardized the stability of the payment system and the national financial system.
So when BES’s eyewatering losses were declared, which forced it into regulatory insolvency, it was denied access to Eurosystem liquidity and trading in its shares and bonds was suspended. The Bank of Portugal’s strong language in this statement echoes that from the new Board of BES: neither seems in any doubt that the activities that directly caused BES’s collapse were illegal. As I noted in my Pieria post, the Board’s statement amounted to an allegation of fraud. The Bank of Portugal’s statement in effect alleges embezzlement, non-compliance with regulatory decisions and failure of fiduciary duty to shareholders. Wow.