The fall of Banco Espírito Santo (BES) took place on August 3, 2014, but the story of how the historic bank collapsed like a deck of cards is old and has always been arm in arm with politics. The case cut across three governments of different party colors and exposed the questionable links between political power and the financial sector. After five years, many questions remain unanswered and the process has not yet come to an end.
August 4, 2014 Pedro Passos Coelho, then prime minister, interrupted the holidays to restrain the mood and to defend that the solution found for BES was the best for the Portuguese. "It will not be repeated again that taxpayers are held responsible for problems that were not created by taxpayers," he said, referring to the Portuguese Bank of Business (BPN), which eight years earlier had been nationalized, with substantial costs for the taxpayers.
The solution found to address BES's financial problems was to separate the bank into two: good bank and bad bank. The Passos Coelho government refused to nationalize the bank, given the problems left by BPN, and, together with Banco de Portugal, the European Commission and the European Central Bank (ECB), came up with a new solution, unlike anything that had been tried at European level to save banks in insolvency.
Broadly speaking, everything that was “good” at the bank (such as customer deposits) was transferred to a new bank, which eventually came under the name “New Bank”. Everything that was considered a toxic asset was in the “bad bank” BES. Everyone who owned BES shares (bank owners plus those who had bought shares in the market) lost the money they had invested, which led to a wave of contestations that has been going on today.
As for Novo Banco, it was injected with money from a Portuguese fund created in 2012 to “provide financial support for the implementation of resolution measures adopted by Banco de Portugal”. The constitution of the Resolution Fund, designed by the then Minister of Finance, Vitor Gaspar, was due to an imposition of the troika and aimed to make the financial system secure its own problems, that the aid of the state. But it did not go as expected.
Still, the then President of the Republic, Aníbal Cavaco Silva, made public in July 2014 that the Portuguese and the national economy would not be harmed. "Banco de Portugal has been perentory, categorical, saying that the Portuguese can trust BES," he said.
A bottomless hole
On the same day that the prime minister was speaking to the country about the case, BES was excluded from the main national stock index PSI-20. In the prospect of a capital increase, it was revealed that the bank was heavily exposed to risks such as default on loan repayments and various clients' difficulties in paying interest. At the end of March, credit at risk represented 11.1% of BES's total portfolio, above the sector average.
But the problems at BES had been around for a long time. Since 2010, the institution had not distributed dividends and 2013 results were negative by 517.6 million euros. The audit requested by Banco de Portugal on the accounts of holding Espírito Santo International, from September 30 to December 31, 2013, "found irregularities in its accounts and concluded that the company was in a serious financial situation."
Mention is also made of the problems of BES Angola and the alleged involvement of the Florida bank in the United States in “illicit activities” and alleged violations of the money laundering law, for which the bank was fined € 1.2 million. In addition, there is the “need for revision of procedures” in the prevention of money laundering in the BES London branch and searches of various banks in Portugal.
To this scenario of “ruinous management”, there are also suspicions that the change of Government in 2011 would not have favored the fate of BES. The accusation of Operation Marquis claims that Ricardo Salgado allegedly corrupted the former Prime Minister, José Socrates (who ruled the country between 2005 and 2011), so that it favored the BES group. The Public Prosecution Service believes that of the 34.1 billion euros entered in José Sócrates's accounts between 2006 and 2015, two thirds (21 million euros) originated in BES entities and “Ricardo Salgado's determination” .
Denying any benefit of the Socialist Party (PS), Ricardo Salgado guaranteed to have good relations "with all political parties". In July 2017, Ricardo Salgado appointed responsibilities for the fall of BES to the Government of Passos Coelho. "Any other government with the least responsibility and no populist intent would have avoided the resolution of a BES-sized bank," he said.
Ricardo Salgado left the bank's leadership after about two decades, and Vítor Bento, then leader of SIBS (the entity that manages Multibanco), was chosen as the new CEO of Novo Banco. A month and a half later, he announced his resignation. This was followed by Eduardo Stock da Cunha and, in 2016, was appointed António Ramalho as president of the Novo Banco.
Turbulent Path to New Bank Sale
Although it was created in 2012, the Resolution Fund only began to receive money from the bank in June 2013. It had only 380 million euros when it was requested to intervene in BES. To cover the bank's hole, the Fund requested a loan from the state of 4,500 million euros and loans to other banks of about 100 million. But until the sale of the New Bank, the Resolution Fund did not recover.
The first attempt to sell Novo Banco started in late 2014. The main stakeholders were Chinese from Angbang and Fosu, as well as Americans from Apollo. Despite the optimism in the Passos Coelho speech, the sale was to be canceled in September 2015, two months before Antonio Costa reach prime minister.
In March 2017, Banco de Portugal announced that the US fund Lone Star would hold 75% of Novo Banco's share capital. The remaining 25% would go to the Resolution Fund, which for three years had been the sole shareholder of Novo Banco. To the country, Prime Minister António Costa argued that "there will be no direct or indirect impact on public accounts, nor new charges for taxpayers" with the sale agreement of Novo Banco.
Also the President of the Republic, Marcelo Rebelo de Sousa, came to defend the agreement signed. “The solution followed by this Government was the same as the previous one. As you will recall, the previous Government has always refused to be the state to capitalize or guarantee in the event of losses. It is a management that will be accompanied by banks, with the idea of limiting the projection of taxpayers as much as possible ”, said on April 4, 2017.
Lone Star injected 750 million euros into Novo Banco, followed by a second capital increase at the end of 2017, worth 250 million euros. Under the terms of the agreement, which was closed on October 18, 2017, Novo Banco also agreed to go to the market to obtain 400 million euros, as was done by Caixa Geral de Depósitos (CGD).
But the problems continued. At the beginning of 2018, the heiress of BES needed a capital injection of 791.7 million euros from the Resolution Fund, which, having not enough capital, eventually borrowed from the state up to 450 million euros. “The New Bank had a buyer. This buyer injected 1,000 million euros into Novo Banco. If that had not been the case, everything would have fallen on the state, ”said Finance Minister Mário Centeno in April of that year.
Mário Centeno guaranteed that the injection of 450 million euros in Novo Banco would not have an impact on public accounts, but a report released by the National Statistics Institute (INE) indicates that the capital injection in Novo Banco was the factor that weighed the most in the accounts. last year, accounting for 87% of the total deficit recorded in 2018.
The invoice, however, is not finished. Earlier this year, Novo Banco requested a new capital injection from the Resolution Fund, this time in the amount of 1,149 million euros. The request followed after the Novo Banco reported losses of 1,412.6 million euros in 2018. The State, the Resolution Fund came to ask for nearly 850 million euros, which, as before, will impact in the public accounts.
The former BES CEO has already warned that capital increase requests will not stop there.