The Bank of Portugal’s decision to transfer just five tranches of bonds on December 29 was not made in isolation. Bankers close to the situation in Portugal say two previous situations influenced the central bank’s thinking.
The first was the rescue of Madeira-based Portuguese bank Banco Internacional do Funchal (Banif) and its subsequent sale to Banco Santander. Banif is Portugal’s seventh largest lender with total assets of €12.8 billion. In a deal finalized in December, Santander will buy the majority of Banif’s assets for €150 million while the Portuguese state will commit €2.26 billion to cover future contingencies: €1.76 billion from the state and €489 million from the country’s bank resolution fund. Subordinated creditors were bailed in as part of the rescue but senior creditors were not.
This followed a €1.1 billion injection of funds into Banif by the state in January 2013 and its €400 million participation in a contingent convertible bond issue by the failed bank. The latest cash injection into Banif added another percentage point of GDP to Portugal’s budget deficit, which ballooned from 4.5% to 7.2% on the rescue of BES. Bailing out two banks has doubled the Portuguese deficit to nearly three times the EU mandated target.
Foreign law creditors
Secondly, the Bank of Portugal has recent experience of the difficulty associated with bailing in foreign law creditors. The ability for legal claims against it by lenders to a Goldman Sachs-arranged loan to BES in 2014 to be heard in the UK Commercial Court seems to have reinforced its determination to limit the December bail-in to domestic bonds only. The US bank had arranged the $835 million English law loan to BES – which was to fund a Venezuelan refined oil project – via special purpose vehicle Oak Finance just weeks before the Portuguese lender collapsed in mid-2014.
The $835 million loan was initially transferred to Novo Banco as part of the BES rescue in August, but in December 2014 the Bank of Portugal resolved that the transfer had not been authorized and the liability for the loan remained with BES. This would mean that lenders would inevitably be wiped out and, unsurprisingly, they made the decision to sue.
However, because this loan had been written under English law, the lenders won the right to sue the Bank of Portugal in the UK Commercial Court. The English court ruled that regardless of the status that the Bank of Portugal’s decision on the transfer of the loan might have in Portuguese law, it had no status under the BRRD and therefore no effect under English law.
It is a situation the Bank of Portugal will not want to find itself in this time, although it has remained defiant in the face of the UK court decision. According to Bloomberg, on January 14 the Bank of Portugal announced that regardless of any court decision BES’s debt to Oak Finance will remain at the bad bank, partly because Goldman has a 2% stake in BES.