Portugal’s turn to play ‘good bank, bad bank’

Europe is still playing "good bank, bad bank". Portugal has injected €4.9 billion of bailout money into the troubled Banco Espírito Santo, splitting it into a "good bank" (Novo Banco) and a "bad bank". The name of the game is to prevent the reverberations of a collapse from spreading throughout the global economy.

Euro zone peripheral nations such as Spain and Italy, as well as shaky economies with business links to Portugal, such as Brazil, were at the front in the line of fire had the Banco Espírito Santo situation been allowed to get nasty.

The indications yesterday were that the plan, carved out between Lisbon and Brussels, had done its job. Stock markets erred on the side of relief. Spanish and Italian government bonds rose, as investors decided that euro zone governments really had got the hang of contagion prevention after all these years of flirting with disaster. Yields on all peripheral state bonds have thankfully remained contained of late despite the “serious irregularities” that were uncovered at Banco Espírito Santo’s parent group.

Yesterday, Nicola Marinelli, an asset manager for Sturgeon Capital in London, told Bloomberg that the problems at Portugal’s largest lender were likely “an idiosyncratic event”. Such views are reassuring, especially to ears in economies such as Ireland, where a recovery, while under way, is hardly a done deal.

But while the woes of Banco Espírito Santo may not be the beginning of a new wave of European bank wobbles, they do provide an unwelcome reminder of the worst of the recent financial crisis. It would be better for all if no events, “idiosyncratic” or otherwise, tested the reputation of the European banking system for the foreseeable future.