Angry investors of Novo Banco threaten legal action should the Bank of Portugal push through with its plans to impose on them a loss amounting to EUR2 billion loss through the senior bonds. This recent decision by the Bank of Portugal goes counter to its prior agreement with Novo Banco which had been established as a healthy counterpart of the ailing Banco Espirito Santo.
In a comprehensive report by the Financial Times, the outcry started late Tuesday night as Novo Banco investors reacted to a statement released by the Bank of Portugal stating that the bonds which have incurred losses of EUR2 billion will be transferred from Novo Banco to the dying Banco Espirito Santo. The bonds will then be liquidated. The transfer is part of the overall strategy to bail out Banco Espiritu Santo that reached up to EUR4.9 billion. However, Novo Banco would absorb the EUR2 billion loss. Any stock transferred to the so-called 'bad bank' Banco Espirito could expect at the very most a single-digit percentage recovery.
The Bank of Portugal defended its position saying that its transfer of five of Novo Banco's bonds from its overall 52 senior bonds was in compliance with existing Portuguese banking laws. Investors, however, said that this transfer goes against a resolution that the Bank of Portugal made a year and a half ago. Some of them said in interviews that significant fixed-income investors who have more than EUR100 million tied into the transferred bonds would be heavily affected and so would their depositors. The end result would be the same - a backlash of lawsuits.
A Wall Street Journal article gives more details of the statement that the Bank of Portugal released. Liquidation of the bonds will happen more efficiently next year once the Bank of Portugal strips off Banco Espirito Santo of its banking license. Novo Banco would then need to implement its sound business plan as the Bank of Portugal continues to find buyers for it, especially as it had tailed to do so last year.
There had been one sign that the transfer of bonds would be imminent a couple of days before the statement released by the Bank of Portugal. A report by UK Reuters revealed that Portugal's marketing trading regulator imposed a moratorium on the trading of bonds issued by Banco Novo. This led speculators to believe that the suspended bonds would be channeled to some other use, which was later confirmed by the Tuesday evening statement of the Bank of Portugal.
