August 4, 2014 / 2:55 PM / in 3 years

Fitch: BES Bailout Has Small Fiscal Impact but Erodes Buffers

(The following statement was released by the rating agency) LONDON, August 04 (Fitch) The split of Banco Espirito Santo (BES) into a "good" and "bad" bank has limited direct fiscal impact on the Portuguese sovereign, but erodes the cash buffer available to deal with any future shocks, Fitch Ratings says. The Bank of Portugal announced late on Sunday that Novo Banco will receive EUR4.9bn of fresh capital from Portugal's Resolution Fund set up two years ago. The Portuguese fund consists of bank contributions and a bank levy but is not large enough to meet the needs of Novo Banco's capitalisation, and so will receive a temporary government loan. Money already set aside for bank recapitalisation under the IMF-EU programme that Portugal exited in May this year is sufficient to cover the cost of the BES operation without additional borrowing. This suggests that the operation will not change our fiscal forecasts for the sovereign, or put any pressure on Portugal's 'BB+' rating. But the establishment of Novo Banco will significantly reduce the cash buffer set aside for Portuguese banks to around EUR2bn, which may limit its effectiveness. There would therefore probably be a fiscal impact if other banks needed support - although this is not our base case assumption. The government's deposit buffer remains large (around 7.6% of GDP) but the cushion against possible market volatility, which helped Portugal make a "clean exit" from its IMF-EU programme without a precautionary credit line, has shrunk. Whether BES's bailout contributes to a reversal of the improvement in Portugal's fiscal financing conditions may depend on investor perceptions of the health of the banking sector and if, like us, they regard BES's problems as idiosyncratic. The spill-over risk appears contained for now, and short-dated Portuguese sovereign bonds continue to trade at multi-year lows. The ECB's asset-quality review may help address any concerns of wider risks in the banking sector. Doubts about the effectiveness of monitoring by national authorities may also contribute to popular disillusion in Portugal with post-programme economic reform and consolidation, which could cause political commitment to the process to weaken. Fitch revised the Outlook on Portugal to Positive on 11 April, reflecting the progress the country has made in reducing its budget deficit, and the improving economy, growth projections and financing conditions. Our next scheduled review is on 30 October. Contact: Michele Napolitano Director Sovereigns +44 20 3530 1536 Fitch Ratings Limited 30 North Colonnade London E14 5GN Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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