Portugal to rescue BES using remaining bailout money

Troubled Portuguese lender Banco Espirito Santo is expected to be split into "bad" and "good" banks under a multibillion euro state rescue plan being hashed out by Lisbon and EU authorities.

The plan, aimed at saving a bank that has been engulfed by the fall of the Espirito Santo family’s business empire, includes using at least half of the €6 billion left from Portugal’s recently exited international bailout programme, sources said.

The bailout money will be used to finance a special bank resolution fund set up by Portugal in 2012 that will in turn inject money into the new Banco Espirito Santo, or BES, "good bank", these people said. BES shares would be delisted under the plan, with shareholders likely to lose their investment, they added.

One source said that the injection could be of at least €4 billion. It was not clear how the bad bank would be handled.

The plan, which is also being worked on by officials from the European Central Bank and European Commission, was due to be announced this morning.

The use of the bank resolution fund – which will eventually have to reimburse the state after recouping money from future investors – is aimed at limiting the political fallout of using taxpayer money to prop up a bank at a time when Portugal is only just emerging from a deep economic downturn, they added.

The scramble to save Portugal’s largest-listed bank by assets comes after BES last week posted a deeper than expected €3.6 billion loss and said it was exposed even more deeply than originally thought to a cascade of bankrupt companies belonging to its founding Espirito Santo family.

Disclosures

Those disclosures, and the announcement that authorities were looking into possible illegal activity at the bank, have scared away investors ahead of a planned capital increase by BES over the next few weeks.

After a tumultuous week in which BES shares lost 75 per cent of their value, authorities at the government and Bank of Portugal realised that using public funds was the only solution for now, people familiar with the authorities’ thinking said.

Portugal exited its €78 billion international bailout in May. – (Reuters)