Portugal imposes almost €2bn in losses on Novo bondholders

Novo Banco emerged from the break-up of Banco Espirito Santo last year

A man walks past an office of the Portuguese bank Novo Bank (New Bank) in Lisbon.

A man walks past an office of the Portuguese bank Novo Bank (New Bank) in Lisbon.


Portugal’s central bank has effectively imposed losses of nearly €2 billion on senior bondholders in Novo Banco, the ‘good bank’ that emerged in last year’s break-up of Banco Espirito Santo.

The central bank has ordered the transfer of some bonds at Novo Banco to Banco Espirito Santo , the bad bank that remained after the restructuring and is due to be liquidated. This effectively imposes losses on their holders.

“This measure was needed to ensure that the losses from Banco Espirito Santo are absorbed firstly by shareholders and creditors and not by the financial system and taxpayers,” the Bank of Portugal said in a statement on Tuesday night.

Senior bonds and deposits were originally spared losses and transferred to the new entity after the breakup of Banco Espirito Santo in August 2014.

The transfer will help to capitalise Novo Banco after the European Central Bank’s stress tests in November showed a €1.4 billion shortfall under the adverse stress- test scenario. Portugal’s central bank said at the time that Novo Banco would address the gap with a plan that would include selling assets. European state aid rules don’t allow further use of the country’s Resolution Fund, which received a state loan last year to bail out Banco Espirito Santo. The fund, which gets contributions from Portuguese financial institutions, injected €4.9 billion into Novo Banco.

The transfer will have a positive impact on Novo Banco’s capital of about €2 billion euros, the Bank of Portugal said.

Novo Banco said in a separate statement that it would increase its common equity Tier 1 ratio, a measure of the bank’s ability to absorb losses, to about 13 per cent from 9.4 per cent at the end of June.

The bonds affected mature in July 2016, May 2017, January 2018, January 2019 and June 2024.

The measure protects depositors and common creditors, and excludes bonds that are part of agreements Novo Banco reached with some clients.

The €750 million euros of 2.625 per cent notes due in May 2017 fell to as low as 7.3 cents on the euro on Wednesday from 92 cents before the decision was announced, according to data compiled by Bloomberg.

The Bank of Portugal said it considers the separation of assets and liabilities at Novo Banco and BES to be complete and would request the European Central Bank revoke Banco Espirito Santo’s banking licence so that the company’s legal liquidation can start.