Novo Banco bondholders want Portugal cbank chief quizzed over bond transfer

LISBON, March 8 (Reuters) - A group of bondholders that lost more than 1 billion euros after the transfer of bonds to the failed Portuguese bank Banco Espirito Santo (BES) in 2015 have asked parliament to question the head of the central bank over the decision.

The so-called Novo Note Group, which includes large investors such as Pimco and Blackrock, argue they were treated unfairly when their holdings, initially included in Novo Banco - the “good bank” carved out of BES in 2014 - were transferred back to BES, which is being wound down.

They said they wanted the central bank chief to be questioned publicly to uncover the damage they felt had been caused to themselves and the country’s reputation.

Any such open questioning would bring the case further into the political arena where some leading members of the Socialist government have already raised questions over the central bank’s decision, which was made before they came to power.

The bondholders have also launched legal challenges in a bid to get compensation, but Portugal’s slow-moving courts have yet to decide on the issue.

The group said in a letter sent to parliament that it “considers that the decision adopted by the Bank of Portugal breached fundamental provisions and basic principles of Portuguese and European Union law as it was discriminatory and arbitrary”.

The letter, which was sent to Reuters, said the circumstances of the decision could expose Portugal to “significant market risk” if there is a new financial crisis.

The group argues that the decision was damaging to Portugal by making investors less likely to invest in government bonds and lend to its banks.

The decision “contributed directly to producing additional costs, that were surely avoidable, for Portuguese taxpayers,” by raising rates for the government and banks, the letter said.

A Bank of Portugal spokesman said it would not comment.

Laurentino Dias, chief of staff of the ruling Socialist Party’s bench in parliament, said the letter had arrived and it would now be considered.

The letter said that a “parliamentary hearing of his excellency the governor of the Bank of Portugal is therefore essential to make clear the true extent of the damage caused,” by the decision.

At the end of 2015 the Bank of Portugal transferred bonds worth 2.2 billion euros from Novo Banco to BES, which was turned into a “bad bank” after it collapsed in 2014. The decision helped to boost the balance sheet of Novo Banco, which has subsequently been sold to U.S. fund Lone Star.

Banco Espirito Santo collapsed in 2014 under the debts of its founding family and after a 4.9-billion-euro rescue its main operations were transferred to a new institution, Novo Banco. Banco Espirito Santo was left with the debts. (Writing by Axel Bugge Editing by Andrew Heavens)