Blog Post

Fact: Banco Espirito Santo gets a 4 billion euro recap

Over the weekend, Portuguese authorities announced the recapitalisation plan for Banco Espirito Santo, involving a 4.4 bn euro capital injection. BES is a test case for the new European approach to the management of banking crises and will be an important case study for policy makers.

By: Date: August 6, 2014 Topic: Macroeconomic policy

Over the weekend, Portuguese authorities announced the recapitalisation plan for Banco Espirito Santo, involving a 4.4 bn euro capital injection. The plan will also include a bail-in of junior debtholders and shareholders as well as a restructuring of the bank, which will be split in two. BES is a test case for the new European approach to the management of banking crises and will be an important case study for policy makers.

After a month of rumors and suspicion, the extent of Banco Espirito Santo’s troubles – once Portugal’s biggest lender – have fully come into light. The central bank of Portugal unveiled on 3rd August a recapitalisation plan, including a restructuring of the bank and bail-in of shareholders and junior debt-holders.

This comes after the bank announced 3.6bn euro losses on July 30, greatly exceeding what was anticipated from previously published information.

As a consequence, BES fell below the minimum solvency ratios in force (recording a Common Equity Tier 1 ratio of 5 per cent, i.e. 3 percentage points below the minimum regulatory level) and its access to the ECB’s liquidity was suspended.

According to the Central bank, “the public perception of the Banco Espírito Santo, S.A. deteriorated further, as shown by the strongly negative performance of its securities, undermining depositors’ confidence. This negative public perception led to the suspension of transactions on Friday afternoon, 1 August 2014, with the risk of contaminating the perception regarding the other institutions of the Portuguese banking system”. In other words, thanks god it was friday, or the week could possibly have ended with a deposit run.

Source: WSJ

BES will end up being restructured and  split in two units. A new “good bank” or bridge bank in the European Commission’s wording, will collect depositors, senior bondholders and healthy assets, whereas bad loans, shareholders’ fund and junior creditors will remain in the old unit that will eventually be shut down. The new EU state aid regime, which was set in place by the European Commission last summer in order to deal with the transition towards the full Bank Recovery and Resolution Directive’s (tougher) provision, requires in fact the imposition of losses on shareholders and junior bondholders before using public funds. Senior debt will instead not be touched. Whether or not the bail-in of junior debt will be enough to absorb losses cannot be certain, especially in light of uncertainty prevailing on the actual size of intra group operations and final exposures. This will be an important variable to look at, with potential effects on the final outcome for public finances.

The newly created “good bank” will be capitalised by the Portuguese Resolution Fund, which will underwrite all its equity, to the amount of 4.9bn. Since the Portuguese Resolution Fund does not actually have enough money to do that – it’s been created in 2012 – it will receive a loan of 4.4 bn euro by the Portuguese State. And the Portuguese State allegedly will draw on some 6.4bn euro leftovers from the IMF/EU bailout funds that were specifically earmarked to banks’ assistance.

Whether or not the operation will turn out to be neutral, for public finances, will depend on whether and how this loan will be reimbursed. This is a very important point in light of Europe’s struggle to overcome the sovereign-banking fragilities that has emerged as a characteristic feature of the crisis and meet the objective that taxpayers’ money are less on the frontline in the future. But there seems to be a bit of confusion on this crucial point, at the moment,

The European Commission states that this loan will be primarily reimbursed by the proceeds of the sale of assets of the Bridge Bank. Which means that the ultimate outcome for the Portuguese State is uncertain, and it will ultimately depend on the valuation that will be given to these assets, on the interest of investors in them and on the actual value that it will be possible to extract on the market. Incidentally, the central Bank of Portugal does not mention asset sales for the bridge bank but suggests that “the loan granted by the State to the Resolution Fund will be temporary and replaceable by loans granted by credit institutions”. On top of this, there is the issue of whether the bad bank will be able to function up to the point when it will be wound up without any additional funding.

A second point raised by this case concerns the supervision of very complex cross border structures (like BES turned out to be). It is by now known that the problems of BES stem from the very opaque transactions that were conducted within its highly complex group structure. As a reminder, Figure 1 shows the ownership chain. BES is 25% owned by ESFG (Espirito Santo Financial Group). 49% of ESFG is owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investment, which is in turn fully owned by ESI (Espirito Santo International).

BES - BES.png

Source: Tracy Alloway FT (@tracyalloway)

Frances Coppola has a must read detailed account of how the intra-group exposure led to the disastrous results. In short, BES was exposed to Rioforte for 270mn euro. It’s exposure to EFSG and subsidiaries in Panama and Luxembourg accounts for 927mn (most usecured) and it is interesting to point out that BES had sold debt issued by ESI and Rioforte to its own retail customers through its branches, with a guarantee to be provided by ESFG. When EFSG filed for creditor protection in Luxembourg, BES was also left to bear the guarantee to its retail clients that ESFG was no longer able to provide. 297mn euro more problems for BES came from the sell of ESCOM by Rioforte to an Angola company, which apparently never paid back. BES’s actual exposure to debt securities from other parts of its Group that it has sold through its branches to clients is not yet clear but it could reach up to 3bn euro. And this may not even be  the full story, as it seems that in July the existence of three special purpose entities (SPEs) was found out, whose assets mainly consisted of bonds issued by BES and that were kept off the book.

Source: BES results

This picture shows probably better than anything else why the establishment of a single supervisor is an absolute necessity in Europe. Part of the reason why all this could happen even though – it is important to stress it once again – Portugal was under an EU/IMF/ECB programme that included also a monitoring of the financial sector, is that the complexity of this group was out of reach for the national supervisory authority that was in charge (Rioforte and ESI for example are based in Luxembourg, and they are not banks).

A third question concerns the bank-bank cross holdings. Figure 1 shows that the second largest shareholder of BES is in fact another bank, i.e. Credit Agricole. Credit Agricole said on Tuesday that it took a 708 mn euro hit from its stake in BES, nearly wiping out its second-quarter net profit, which fell 97.5 percent to 17 million euros. This raises a point of general importance, as banks tend to be important investors into other banks, also outside the Portuguese case. Almost 40% of securities other than shares issued by banks in the euro area are held by other banks in the euro area at the aggregate level, according to ECB data. The next question to ask therefore could be whether by trying to solve the sovereign-bank vicious circle we are not just unveiling another one, that deserve equal attention.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic

Upcoming Event


How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

May - Jun


Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article


European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author


The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts