Over the weekend Portuguese officials scrambled to rescue Banco Espírito Santo, one of the country’s largest banks. Unable to find private investors willing to prop up the bank’s rapidly deteriorating balance sheet, the government will instead use €4.9 billion ($6.6 billion) of its own funds to save the ailing lender.
Or, rather, only part of it. The bank will be split in two, with public funds going to “Novo Banco” (New Bank), which will house most of the bank’s deposits and viable assets. This leaves depositors and senior bondholders unscathed (for now).
The rapidly souring loans and securities to blame for bringing the bank down—namely, exposure to cash-strapped Espírito Santo family holdings and a teetering bank in Angola—will be quarantined in a separate “bad bank.” This institution is what shareholders and junior bondholders now own, with any hope of recouping their losses now dependent on the bank’s toxic assets turning out to…
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