The heavyweight committee members of the International Swaps and Derivatives Association have met in London and decided to postpone until February any decision about the status of the Novo Banco bonds controversially transferred back to BES.
Today's meeting was attended by representatives of Bank of America, Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Nomura.
The bankers were joined by representatives from global asset management funds Alliance Bernstei, Blue Mountain Capital Management, Citadel, Cyrus Capital Partners, and Pimco which has been highly critical of the decision of the Bank of Portugal to remove €2 billion in bonds to make Novo Banco look better before being sold.
On 29 December last year, the Bank of Portugal governor Carlos Costa (pictured) decided to move five classes of senior bonds from the relative safety of Novo Banco, back to BES where their value plummeted 80% overnight.
This measure led several large international investors to threaten the Bank of Portugal with legal action due to the losses incurred as it is more than likely that the 'bad bank’ BES has no financial capacity to ensure the repayment of the bonds or interest.
Investors have been asking the International Swaps and Derivatives Association (ISDA) if the Bank of Portugal’s move can be classified as ‘credit event’ - when an institution defaults on a significant transaction, in this case the bonds.
The ISDA has asked for information and reports as the decision is a crucial one. If the committee decides that a credit event did take place, investors could trigger insurance policies (Credit Default Swaps) that cover losses on the bonds.
It gets worse - if the ISDA declares a credit event, a legal clause will come into play that will trigger further insurance payments for more than 50 Novo Banco bond issues, totalling €18 billion. If the insurers have to pay out, few will want to do business with Portugal in a hurry and ratings agencies will be hard pressed to justify maintaining current grades.
The decision has been postponed until February 12th while the ISDA committee members await "clarification" from the Bank of Portugal and Novo Banco, their rationale needs to be better than good.
The Prime Minister António Costa already has said that he warned the Bank of Portugal that he was "apprehensive about the systemic effects" of the switch, with bondholders discovering that "what they considered to be protected wasn’t protected."
This gets more involved as Jornal de Negocios reported yesterday that the Bank of Portugal has hired Deloitte to assess bondholders' losses, and already is considering paying compensation i.e the taxpayer will end up with another unwanted bill on top of the massive losses Costa has managed to saddle us with from the collapse of Banif and BES.
Overall, the Bank of Portugal has left the taxpayer exposed yet again by another ill-thought-out move made more for personal reasons than for the good of the Portuguese people.
Costa is desperate to sell Novo Banco for the €4.9 billion sunk into it from public and banking funds when BES went bust. His Novo Banco bond move made the bank €2 billion more attractive at the stroke of a pen.
The Bank of Portugal governor Carlos Costa’s lack of grasp is clearly visible from an international viewpoint and Portugal's reputation has deteriorated significantly in a few short months of continued incompetence.
The Prime Minister has criticised Carlos Costa but has not acted to replace him. This needs doing now before any more damage is done.
