Just a few months after exiting an EU bailout program, Portugal has said it will bail out its third largest banking group, Banco Espirito Santo (BES). The bank reported record losses in the first half of 2014.
Ailing Banco Espirito Santo is to receive a massive bailout package to the tune of 4.9 billion euros ($6.6 billion). The rescue was a necessary step for Portugal's banking system, which could not withstand a payment default by BES, according to Portugal Central Bank Governor Carlos Costa.
"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 late Sunday.
Portugal exited its EU bailout program in May. The funds for the injection come from the Resolution Fund set up under Portugal's 2012 bailout.
According to Portugal's central bank governor, BES' healthy assets will be separated from its toxic assets and regrouped into a new bank called Novo Banco.
The country's third largest bank has been plagued by scandal and heavy losses this year. Last month, its head, Ricardo Espirito Santo Salgado, was arrested for alleged tax fraud and money laundering and subsequently forced out of his spot. Authorities later released him on three million euros bail.
The bank took another hit on Friday when it announced first half losses in 2014 amounting to 3.57 billion euros. Its shares plunged to 0.12 euros, a loss of 40 percent.
Shareholders to pay price
Following the news, Central Bank Governor Carlos reassured customers in his announcement that they would be protected from the losses.
“[Shareholders] will have to bear the responsibility for the remaining risks,” Costa said late Sunday.
French bank Credit Agricole, which holds roughly 15 percent of BES' shares, and the main shareholder Espirito Santo Financial Group, with its 20 percent shareholdings, will bear the heaviest burden.
kms/av (AFP, dpa)