The WSJ reports,"Portugal's central bank late Sunday unveiled a plan to rescue the country's second- largest lender by breaking up the bank and pumping in billions of euros of state money.
The fate of Banco Espírito Santo SA is surprising given that only a few weeks ago the Bank of Portugal said the lender had enough capital to withstand shocks coming from its parent, a Luxembourg-based conglomerate that ran into trouble after an auditor found accounting irregularities.
Banco Espírito Santo not only provided loans to the parent and its units but it also sold billions of euros of their debt to customers.
Under the €4.9 billion ($6.6 billion) plan, depositors and senior bondholders will be spared, while the bank's subordinated creditors and current shareholders will be in line for losses.
"It became imperative and urgent that a solution was implemented to guarantee deposits and safeguard the financial system," said Bank of Portugal Gov. Carlos Costa, who added that the bank had lost access to liquidity beginning Monday.
In a statement, the European Commission said the solution found was in line with state-aid rules.
Behind the bank's quick deterioration was a €3.6 billion first-half loss reported on Wednesday. While the Bank of Portugal was expecting losses close to €2 billion, it found out the lender continued to increase its exposure to the parent, Espírito Santo International SA, and related entities in the second quarter against its instructions.
Under resolution-fund rules, a bad bank will be set up with toxic assets from the lender, including the loans given to Espírito Santo entities that could be unrecoverable, and 56%-owned Banco Espírito Santo Angola, with a portfolio of souring loans. Current shareholders, including Banco Espírito Santo's parent, with a 20% stake, and France's Credit Agricole SA, with a 14.6% stake, will stay with the bad bank, along with subordinated creditors. The bad bank will be wound down.
Shares of Banco Espírito Santo have fallen more than 65% since Wednesday. They were halted from trading Friday at 12 euro cents.
The good bank, meanwhile, with all the deposits and other healthy assets, will receive the capital injection. It will be rebranded.
Authorities hope that by separating the healthy part of the bank from the bad, investors will be interested in buying it. Proceeds will be used to pay back the bailout loan".
