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August 5, 2014
August 5, 2014

Portugal: Has the Banco Espírito Santo (Holy Spirit Bank) fallen from the sky?

Author: Renato Guedes Translator: Gustavo Roxo
Source: Revista Rubra  Category: On the crisis
This article is also available in: elpt-pt
Portugal: Has the Banco Espírito Santo (Holy Spirit Bank) fallen from the sky?

What became known this week –and we knew it as a fact since Sunday night– was the default of BES[1]. We also knew that the government apparently ranks the distribution of the assets in two levels: in the first they include those who have more rights, i.e. the depositors and holders of senior debt issued by BES, and in the second they put the others, who are the holders of subordinated debt and the shareholders; the first is what they called the “good bank” and the second what they called the “bad bank”.

The first question I have is: how bad is this “bad bank”? This question can only be answered after it is known who is the owner of what constitutes the property – so far the only thing we can be sure of is that it is of value- of the GES[2], the “bad bank” or the “good bank”? We don’t know it. Let’s assume the worst scenario, which hasn’t been confirmed yet. For some reason, Pedro Lino, administrator of the broker Dif. Broker, in a statement to the Jornal de Negócios (Business Newspaper) on August, 4th, said that: “still, the fact that the shareholders capital has not been completely eliminated is positive, unlike what has already happened in the bankruptcy of European banks like the Dutch SNS REAAL.”

So, Hospitals, Portucel, Tivoli, Comporta, Portucale[3], where does this legacy fit? Nobody has yet explained if the shareholders and subordinated debt holders of the “bad bank”- which the Government says it hasn’t saved- are going to take the distribution of valuable property as a gift. If so, for whom was the deal bad? Certainly not for those who were on the edge of bankruptcy and may still walk out with a Portucale in their hands, whether good or bad, even if, by chance, it is connected to the “bad bank”.

The second doubt: in the “good bank”, what are the existing bonds related to? I’ll explain: I don’t know how these bonds are classified, nor their relationship to the Espírito Santo Group. And I would like to know. The SIC[4] announced that the subordinated bonds, bought at BES branches, will be included in the “good bank”.

The third question: if, during these days, ordinary people withdrew their deposits from the BES, how many withdrawal requests could BES honour? To put it in another way: what is deposited there, what value does it have? Is there anything left at all?
What is this money that the state is putting on Banco Novo?

A commercial banking or finance company is financed by issuing equity or incurring debt. If the debt is long term, it is usually titrated by bonds. Now, there are various types of bonds.

There is a type of bond whose collateral is the company’s own shares, i.e. if the company does not pay the creditor, then the creditor will hold part of its capital.

In 2013, Banif[5] asked the state to inject 1,100 million €. And the state did it. More than 700 million € were issued through shares, which means that the state owns now more than 70% of the Banif. The remaining 400 million € were injected as subordinated bonds, i.e. if Banif doesn’t pay, then the amount of the debt is converted into shares.

Why, then, last year, when the deficit increased by 700 million €, as a result of the agreement with Banif, did they only count those 700 million € out of the 1,100 €? Because, according to Brussels, capitalizing a bank is considered an expense, which thus affects the calculation of the deficit. But borrowing is not, on the contrary, borrowing is an asset purchase. And this distinction is not accidental. Brussels knows what everyone knows, that in the context of a bank recapitalisation, when you put money into its capital, you get married for good or for bad, and the State will not get rid of those shares without losses- it can sell them, but it will always be for a very low price, which is their real value and it is only the state intervention that allows them to worth more. Well, Banif has committed itself to purchase from the state 400 of the 1.1 billion. But it didn’t happen. Why? Because nobody puts any money there except the state and the state puts it there because no capital owner would voluntarily take such a high risk.

What is happening today in Banif? At best, dirty money from Equatorial Guinea comes in and replaces part of the state, which means, there is a placement of capital from those who are willing to take high risks, and, in the process, allegedly, launder money. In this case, it is known that there are international search warrants issued against the family of the dictator of Equatorial Guinea. At worst, the state remains the guarantor and safeguards the capital of private interests.

If, in the BES case, the 4.5 billion € are so secured –and are good–, the fact is that the deficit will increase, since, for Brussels, such a transaction has the typical characteristics of a recapitalisation equal to the one made in BANIF, that is, by purchasing shares of the bank. At least, that’s how the Finance Ministry believes the INE (National Statistics Institute) will account that sum. In fact, and this is my opinion, nobody will take from that 4.5 billion € from BES.

I will close with a short note. All of the Portuguese banking system is, since 2008, linked to the state through a catheter of capital that, in order to maintain and enhance the compensation of private property, i.e. the property titles held by shareholders, absorbs pensions, reforms, wages, jobs… and the welfare state… BES is not an isolated case, and even less did it fall from the sky. Public debt went from 70% to 130% of GDP in these years of “rescuing” the financial sector. This is the spirit of capitalism. And if some say that it’s capitalism “without its protestant ethic”, others, like me, will say that it never had this ethic. So the big question today is not whether or not the state will sink our welfare in BES -because that, with the decades of such governance, is guaranteed -, the unknown is whether there will be a strong political organisation and social mobilisation, that is determined to stop it.

Renato Guedes, Theoretical Physicist, researcher in the Faculty of Sciences of the University of Lisbon


[1] BES: Banco EspíritoSanto , now bankrupt was one of the biggest and oldest private banks in Portugal.
[2] GES.: GrupoEspírito Santo, financial group containing the BES.
[3] Portucel, Tivoli, Comporta, Portucale: Different big companies where the GES was involved.
[4] SIC: Portuguese TV network
[5] Banif: Banco Internacional do Funchal, another Portuguese private bank.

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