LISBON – Portugal will inject 4.4 billion euros ($5.9 billion) into the crisis-hit Banco Espirito Santo (BES), national bank governor Carlos Costa announced late on Sunday, amid fears of a catastrophic bank run.
The bank will be split into two entities, with its toxic assets isolated and its healthier assets regrouped in a new Novo Banco, Costa said.
Novo Banco will be controlled by the Resolution Fund set up by Portugal's banks as part of the conditions for a 2012 national bailout by the troika of the EU, IMF and European Central Bank (ECB).
In intervening to deal with the ailing bank, which recorded first-half losses of 3.57 billion euros last week, the Lisbon government is seeking to avoid contamination throughout its fragile economy and into the wider eurozone.
"There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system," Costa said, evoking the risk of a payment default by BES which would endanger Portugal's financial system.
The "bad bank" will remain in the hands of current shareholders, who risk major losses.
Under new European rules, shareholders and bond holders have to contribute to any bailout before the state puts in taxpayers' money.
The cash injection from the state is designed to stop savers pulling any more money out of the bank, and to assure them their money is safe, analysts said.
At one stage during Friday trading, BES's market value sank by one billion euros in a single minute in reaction to the first-half losses, the worst ever recorded in the eurozone country.
The bank was plunged into turmoil last month by suspicions that its holding company, the family-run Espirito Santo International (ESI), covered up a 1.3-billion-euro hole in its accounts.
Then the bank's veteran head Ricardo Salgado was forced out before being arrested last Thursday in connection with money laundering allegations.
Fears that the bank's collapse could have serious consequences for Portugal, which only exited a 77-billion-euro ($106 billion) EU-IMF rescue programme in May, has worried global markets as questions resurfaced over eurozone debt.
Banco Espirito Santo share trading was suspended on the Lisbon bourse on Friday after a 75 per cent fall in value over the week.
To stop more panic selling, the Portuguese authorities plan to withdraw BES from the stock market on Monday, the Lisbon newspaper Diario de Noticias said on Saturday.
This is the first test of the new transitionary rules before a European banking union is put in place in 2016, when all banks will have to submit to supervision by the ECB to prevent taxpayers having to foot the bill for crashes.— AFP