Portugal’s Banco Espirito Santo went bust with losses of €3.6 billion
They say history repeats itself for those who were not watching the first time.
One lesson from the Irish banking collapse was putting the burden on the tax payer while senior bondholders got all their money back was an unfair, dangerous and destabilising error.
Ireland fully repaid senior bondholders who had lent money to the banks. That cost so much it was one of the reasons why the country had to be bailed out by the EU and IMF.
The experience in Ireland prompted Europe reconsider how banks should be rescued and who should pay.
After years of meetings, the EU agreed on a new set of rules which will come into force in 2016. They stipulate that senior bondholders get burned before taxpayers have to pay up.
But this month the Portuguese have introduced a bank rescue which completely ignores the lessons from Ireland.
Banco Espirito Santo went bust with losses of €3.6 billion. The Espirito Santo family, who were behind the bank, were involved in everything from hospitals to cattle ranches.
The bank had massive exposure to family controlled businesses and Portugal’s central bank is investigating an alleged fraudulent funding scheme – it all has a familiar ring to it.
In cobbling together a rescue, the Portuguese burned the junior bondholders but it appears the senior bonds will be fully repaid.
The money is coming from a €4.9 billion bailout from Portugal’s state backed bank resolution fund. While other banks contribute to the kitty, the government borrowed €4.4 billion to put into the pot.
So the taxpayer has been put on the line for a rescue of bank with questionable lending and the senior bondholders will be fully repaid.
All of this is happening under the watchful eye of the Troika which continues to have Portugal under surveillance after its exit from the bailout in May.
The only good news that this type of rescue will be banned by the EU after 2016. That is if the new rules are obeyed.