State aid to Novo Banco may reach €10.8 billion

State aid to Novo Banco could reach €10.8 billion, according to the calculations made by the Court of Auditors (TdC) in the audit report published on Monday.

The Court of Auditors provides a breakdown of all state aid measures to Novo Banco since the BES resolution in 2014, including injections that have not materialised but are provided for in the 2017 sale agreement that was negotiated with the European Commission.

Right at the BES resolution, Portugal’s state-backed Resolution Fund made an injection of €4.9 billion for the capitalisation of the then-newborn transition bank, having resorted to loans from the state and the banks to finance this operation.

Three years later, when Novo Banco was sold to the US private equity firm Lone Star, the firm led by Máximo dos Santos (a public-law entity) made further commitments worth €5.9 billion, which are divided into the following measures:

• 3.9 billion relating to the contingent capital mechanism, and of which Novo Banco has already requested around €3.6 billion;
• The issuance of Tier 2 subordinated bonds amounting to €400 million;
• €1.6 billion of additional capital (capital backstop) if Novo Banco’s ratio falls below the applicable capital requirement up to the amount necessary to ensure long-term viability, under the European Commission’s Decision of October 11, 2017.

“The value of the state aid measures to Novo Banco, by injecting capital, corresponds to 23% (10.8 billion euros) of the value (of 47 billion) of BES’s risk-weighted assets at the date of resolution,” the Court of Auditors said.

The TdC left two further comparisons: “The Bank of Portugal estimated in 2014, as the cost of BES’s disorderly resolution, losses between €20 and 25 billion. The estimate was later confirmed in a report carried out by Deloitte, which estimated the losses that creditors would have suffered in a BES liquidation scenario at €22 billion.”