November 14, 2015 / 1:29 PM / 4 years ago

UPDATE 2-ECB demands Portugal's Novo Banco plug $1.5 bln capital hole

(Updates with political reaction, statements by central bank, Novo Banco)

By John O’Donnell

FRANKFURT, Nov 14 (Reuters) - The European Central Bank has ordered Portugal’s Novo Banco to fill a 1.4 billion euro ($1.5 billion) hole in its finances, possibly delaying its planned sale and hampering Lisbon’s efforts to draw a line under its biggest banking collapse.

The request to repair Novo Banco, created from the failed Banco Espirito Santo (BES), presents a challenge for any anti-austerity, Socialist-led government that could come to power in coming weeks after a parliamentary vote this week.

Of nine banks across the euro zone tested by the ECB as a follow-through on wider checks last year, only Novo Banco was found to be short of capital. It has two weeks to present a plan of action and nine months to plug the gap.

The Bank of Portugal said in a statement that Novo Banco had already started working on a plan to raise capital through asset sales to meet the shortfall. The plan will be presented in the coming weeks.

The central bank failed to sell Novo Banco in September as the bids it received were seen as too low. The result of the ‘stress test’ means the sale can resume.

“Preparation for the new phase of the sale process will be initiated immediately, now that one of the main factors of uncertainty hanging over the previous process is out of the way,” the Bank of Portugal said.

The Bank of Portugal is in charge of the sale process under the terms of the 4.9 billion euro rescue plan for BES, which was carried out by a bank resolution fund that is formally the responsibility of Portugal’s other banks. The government lent part of the money to the fund used in the rescue and must be repaid.

Novo Banco said in a separate statement that among its plans to raise capital, it will sell insurance company GNB Vida and other non-strategic holdings.

Political uncertainty could weigh on the sales process when it resumes.

The centre-right government was ousted in a parliamentary vote this week by the centre-left. In an Oct. 4 election, the centre-right won the most votes but lost its parliamentary majority, which swung to the left.

The Socialists are now trying to form a government with the help of the far-left Communists and Left Bloc, all of which are opposed to privatisations.

Jorge Pires, a member of the Communist Party’s policy-setting commission, said the result of the stress test underlined the high costs of the rescue of BES, adding that Novo Banco’s sale “should be stopped immediately.”

“It should remain in public control with its activity focused on public investment,” Pires was quoted as saying by state news agency Lusa.

The prospect of a government backed by the far-left Communists and Left Bloc has already rattled investors, worried that a fragile economic recovery could be derailed in a country that only last year exited an international bailout programme.

The collapse of BES in August 2014, under the weight of the debts of its founding family, was the biggest financial failure in Portugal’s history. Novo Banco is the “good bank” created from BES. ($1 = 0.9285 euros) (Additional reporting by Axel Bugge in Lisbon; Editing by Jane Merriman and Hugh Lawson)

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