Porque será que eles desconfiam?

The Good

• The proposal has been quickly put together and quickly approved by the Commission under its state aid rules – at least relative to the fact that the worst was only fully revealed in Wednesday’s financial results.
• There will be losses for investors and some level of bail-in. This is a positive step compared to the financial crisis when such a flagship national bank would likely have been bailed out directly and completely.
• This issue which has rumbled on for some time finally has a clearer end, ensuring it does not spill over into the rest of the Portuguese or eurozone banking sector.

The Bad

• The Bank of Portugal’s (BoP) claim that “this operation does not involve any costs for public funds” is at best hollow and at worst deliberately misleading. The state is clearly providing a loan which will continue to be at risk until it is repaid and which will at the very least divert funds from other avenues.
• Following from this, the plan for the repayment of the loan is far from clear. The BoP claims it “will be temporary and replaceable by loans granted by credit institutions” but exactly who will be willing to take on the role of fully capitalising a new bank is unclear. The resolution fund is meant to be financing by private sector contributions, however, forcing this cost on other banks will surely raise some moral hazard and competition issues.
• In any case, the idea that the loan or injection is temporary and easily repayable has been the generic qualifier used on all bank bailouts – it is sometimes proved true but often false.
• If the loan is not repaid by the end of the year, the state will have to issue €4bn odd extra bonds to meet its target of having a €10bn cash buffer for the start of 2015.
• Senior creditors have been protected. While this is in line with the state aid rules it is not in line with the upcoming Bank Recovery and Resolution Directive (which comes into force in January 2015). Some might argue this is not in the spirit of the regulation. After all, it is a bit strange that there would be such widely different rules for another bank which might run into problems in six months’ time, especially as the rules have already been agreed upon.

The Ugly

• What exactly will happen to the bad bank is unclear. As has been demonstrated the exposures to the rest of the conglomerate are a sink hole for funds and whether the value of existing shareholders and subordinated debtors will be sufficient is unclear. If it does require more funding it is not said where this might come from.
• As Frances Coppola points out, the Commission and the BoP don’t quite seem to be on the same page with regards to the future of the good bank and the repayment of the loan. As explained above the BoP expects the loan to be refinanced by the private sector with the good bank becoming a permanent institution. However, the Commission expects it to be a temporary “bridge bank” which will be sold off (as a whole or in parts) with the revenue repaying the loan. Exactly what this would mean for the Portuguese banking sector (of which the new bank remains a large part) and the majority of the 10,000 bank employees based in Portugal is unknown.
• In broader terms, the way this whole affair has been handled is a bit ugly. Serious problems were first revealed by auditors back in early 2013. Why it has taken numerous public and private audits to finally get a clearer picture of the mess within the bank is a serious question which needs to be answered.
• Investors who were convinced by the bank and those firms employed by the bank that the risk they were taking on in purchasing shares or subordinated debt was much lower than the reality will face large losses. They may have some legal recourse but this will be a long and messy process. Again the due diligence on such sales seems to have been well short of what is needed, checks and reviews need to be done here.

There are signs of progress and learning in this plan. It has been quickly put together and the use of good and bad banks (similar to what was done in Sweden 1990s) may prove more effective than the approach used during the financial and eurozone crises. That said, there is plenty of uncertainty and some incoherence. This remains a messy situation and unwinding it will take some time and considerable effort, for which it is not yet confirmed that taxpayers will not foot any of the bill.

Via FORBES