Novo Banco: what’s at stake with parliament’s decision

Portugal's parliament has decided to cancel the transfer of €476 million from the bank Resolution Fund to Novo Banco, and has put the contract between the bank and Lone Star in jeopardize.

The Novo Banco topic was the main highlight this Thursday in the approval of the State Budget (OE) in the Portuguese Parliament, after the Left Bloc’s proposal to stop the transfer of the Resolution Fund to the bank in 2021 was approved, with the objective of making the Court of Auditors’ audit known first.

The Bloc’s proposal decreases the total expenditure authorization value of the Resolution Fund by eliminating the expected expenditure on financial assets. “That is, the authorization for the transfer of 476,608,819 euros to Novo Banco is withdrawn,” explains the left-wing party.

The objective with this situation is to wait for the first conclusions of the Novo Banco’s audit, carried by the Court of Auditors, – that it is expected to be delivered in April – before injecting money into the bank that was expected to take place in May of 2021.

This proposal was made possible with a negative coalition in the parliament that brought together PSD, BE, PCP and PAN. CDS abstained and PS, Chega and Liberal Initiative voted against.

With this unexpected decision, the only thing that the Portuguese government can do is presenting a Supplementary Budget in 2021 to approve an amendment to the Resolution Fund to allow the transfer to Novo Banco. If they fail to do so, the bank’s future will be unknown.

Parliament decision put’s contract obligations with Lone Star at risk

Portugal’s government, through the Resolution Fund, has a contract signed with Novo Banco and Lone Star – which was legitimated by the European Commission and the European Central Bank – that foresees the possibility of injecting up to 3.89 billion into the financial institution, as the bank led by António Ramalho recognizes losses from the sale of a toxic asset portfolio inherited from BES.

So far, the Novo Banco has already raised 2.976 billion, and may still use 914 million euros. For 2021, on the occasion of the losses accounted for this year due to the pandemic crisis, the Treasury expects 476 million euros to be injected into Novo Banco in order to restore the bank’s capital ratios to levels above regulatory requirements.

So with the new proposal approved by the parliament, the state is at risk of failing to comply with the contract it has previously signed with Lone Star, which could lead to a litigation level whose consequences will depend on what is foreseen in the sales contract for this case, the content of which is unknown.

Prime minister António Costa in the Portuguese parliament.

Despite the “surprise”, Portugal’s prime minister is confident

After the decision was made official, the prime minister didn’t leave any details on how the government will act after Parliament has stopped new injections into Novo Banco. Still, despite this setback, António Costa was fairly reassured that the Portuguese state will fulfill the contract signed with the Lone Star.

“I won’t discuss legal technicalities, but the only thing I will say is that a contract signed is a contract that must be honored,” the prime minister assured.

“Law that exists is law that must be respected, and legality will be ensured in a country that is honored to be a constitutional state. We are not a country where the Constitution, laws and contracts are torn to political convenience,” António Costa reiterated.

Lastly, the prime minister recalled the country’s credibility abroad and wanted to leave a word to international investors to ensure that “the Portuguese state is a state under the rule of law, a state that honors the laws and the contracts it signs.”