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Three questions on the Banco Espírito Santo case for banking union

As shares were suspended in Portugal's third largest bank, Banco Espírito Santo last week, sovereign spreads in the euro area increased and bank stock

Publishing date
14 July 2014

As shares were suspended in Portugal's third largest bank, Banco Espírito Santo last week, sovereign spreads in the euro area increased and bank stocks were weakened.

Together with Zsolt Darvas and André Sapir I published a policy contribution in February, looking at how to manage exits from financial assistance for Ireland, Portugal and Greece. In our recommendations for Portugal, we argued that the country should not have made a clean exit when its programme ended in May 2014, because compared to Ireland it faced higher interest rates, had poorer growth prospects and had probably less ability to generate a consistently high primary surplus. A precautionary arrangement would have been advisable for a number of reasons but most importantly as a measure to stabilize market expectations and prevent market over-reactions.

The key questions now are three-fold:

  1. Is the BES case an isolated case in which problems had grown too big to be hidden any more? It may also foreshadow a changing supervisory regime, with the ECB gradually taking over, which changes supervisory incentives and increases the pressure on banks and supervisors to act. If the latter, will we be seeing more such instances happening in the next months? 
  2. How and how much will the BES case affect economic growth of Portugal? Hopes are it will be an instance of de-zombification, which improves growth prospects, but negative market reactions and spreading contagion could undermine growth instead, at least in the short run.
  3. Will the relatively tough bail-in rules be implemented? If yes, will the system prove robust enough to withstand the shock or will financial nervousness increase? If no, will the Portuguese government eventually have to step in with state aid and how much will this undermine debt sustainability increasing market nervousness instead?

Overall, the current case is not only very interesting on its own right but even more so in its broader implications for Europe's emerging banking union. Answers to the questions above will be crucial for Europe's banking union.

About the authors

  • Guntram B. Wolff

    Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Public Policy and Economics at the Willy Brandt School of Public Policy. From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

    An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and  advisory board of Elcano.

    Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media. 

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