The Bank of Portugal yesterday approved the transfer of €1.985 in bonds from Novo Banco back to Banco Espírito Santo to boost Novo Banco's balance sheet.
Novo Banco received €4.9 billion when it was set up in the wake of the BES collapse in August 2014 and this devious financial move means Novo Banco suddenly is nearly €2 billion better off and now fit for sale.
The European Central Bank was not happy to spot a €1.4 billion hole in Novo Banco’s capital this autumn and commented on this week's move "From this measure, in net terms, there will be a positive impact on Novo Banco's capital of about €1.985 billion."
At the time of the BES rescue, its 'good assets' were transferred to Novo Banco. The dodgy liabilities stayed with BES which is being wound up over time but the bonds represented a liability to investors and Novo Banco wanted to get rid of such inconveniences.
This transfer of bonds magically will disappear from Novo Banco’s balance sheet and reappear in the bombed out shell of BES. Problem solved.
The Bank of Portugal is delighted at this wheeze as it makes Novo Banco a more attractive purchase when it is up for sale again, more attractive by €1.985 billion, as Novo Banco now meets the capital requirements set by the European Central Bank.
The bonds transfer, which was gleefully approved by the Bank of Portugal calling it “purely an accounting measure”, means that "Novo Banco is now in a condition to meet the capital requirements that resulted from the regulator's recent comprehensive assessment stress test."
The government is happy as the financial pain will be felt by institutions rather than members of the public; hence it is not much of a vote loser. In fact there are private investors involved who have lost the lot, a fact the Bank of Portugal has tried to gloss over.
However, and as expected, investors will challenge this financial chicanery as being completely illegal.
The Association of Analysts and Investors in the Capital Market sent up a warning flare that court action is inevitable.
Octavio Viana of the Association said that in his members’ view the move was “clearly illegal because it violates very important principles: the equal treatment of holders of these categories of securities,” calling the move "manifestly illegal."
Comments
From Publico today:
"According to several market sources contacted by Publico, the decision of the Bank of Portugal may hinder future issues of senior debt by national banks. "When a Portuguese bank need to issue debt, we'll see if will have buyers," noted Filip Silva, asset management director of Banco Carregosa.
Recent losses in bonds of banks may have a negative impact on the issuance of such debt by other domestic companies, which in recent years had to resort more to this form of financing."
Which points out that 'reneging' on the holders of BES debt will impact on all Portuguese banks seeking creditors to lend to them. These debts are now available to be traded on the Portuguese stock exchange but are worthless unless a court later finds in the creditors favour. So we now need to know if the contracts are based on UK or Portuguese law.
Lastly - is there anything suspicious in Senior Bonds NB 6.9%, maturing in June 2024 being the only debt not released back for trading on the Portuguese Stock Market? Was it reserved for heavyweight special VIP's or Espirito Santo family.