Portugal’s government and its European Commission masters have managed to come to an outline agreement to recapitalise Caixa Geral de Depósitos with an injection of €2.7 billion in taxpayers’ cash and an issue of debt and other measures taking the total to €4.6 billion, 100% higher than departing management estimated.
Caixa Geral has huge bad debts and the past management of the bank is being investigated by a parliamentary commission to see how its directors allowed the bank to lapse into such a state of degradation.
Portugal’s government has been trying to work out a sneaky way to make sure any cash injection does not show up as State aid and, more importantly, does not get added to the country’s deficit which PM António Costa has promised will be 2.5% this year.
The European Commission has agreed to the fiddle, saying on Wednesday 23rd August that the recapitalisation will be on ‘market terms’ with sufficiently high guesstimated returns for the State to call it a loan, not State aid.
However, the Finance Minister Mário Centeno, on Thursday morning 25th August, said he now will have to present an amended budget. At a press conference, the Minister of Finance said that "the injection of €2.7 billion will have an impact on public debt."
The EC trotted out the usual guff about the plan being aimed at returning Caixa Geral to long-term health through cost cutting, improved efficiency and something it called ‘de-risking measures’ which hopefully means the bank will be run by people who know what they are doing, although this may be hard to achieve as when considering the conflicts of interests inherent in the government’s choice of board members.
Margrethe Vestager, the EC’s Competition Commissioner said, "last night we reached an agreement in principle with the Portuguese authorities on the way forward to enable a recapitalisation of Caixa Geral on market terms."
Under the plan, Portugal’s taxpayers involuntarily will inject a further and entirely unwelcome €2.7 billion, transfer ParCaixa shares held by the State to Caixa Geral and convert €900 million of unpaid CoCo bond debt into equity. The €2.7 billion in cash will hit the nation's finances this year and makes the government 2.5% deficit target unachievable.
Caixa Geral also has committed to raise €1 billion of capital through subordinated debt, which means private investors have an unappetising opportunity of increasing the bank's equity without becoming shareholders.
Caixa Geral received state funds in 2012 when €1.65 billion was injected via CoCo bonds since which time the bank slid into further debt as cosy loans were not repaid, as many expected, and commissions seem to have been paid to top Caixa Geral bankers in return for agreeing loans to uncreditworthy companies.
The bank posted a loss of €205 million in the first half of the year due to bad loans and a management that long ago treated Caixa Geral as a State-backed loans facility for highly suspicious loans.
In June 2016 the government ordered an independent audit of the bank after allegations that many loans were not covered by any collateral and were to VIP 'friends of the regime' with no expectation of repayment but with the full expectation of an under-the-counter percentage commission payable to the bankers in charge.
Especially notable was the period of administration under Carlos Santos Ferreira and Armando Vara whose €200 million loan to Vale do Lobo involved a percentage repayable directly to Vara and channelled into a Swiss bank account, was uncovered in the José Sócrates 'Operation Marquês' inquiry and was as notable as the many other unrecovered loans to 'friends and family.'
When it came recently to appointing a new board of directors for the ailing State bank, many on the government's list lacked the necessary banking qualifications and before they take up their positions, have to go on an expensive training course on the insistence of the ECB.
The list included eight names which under the rules could not possibly be appointed to Caxia Geral’s board as they have too many directorships and therefore could hardly have been expected to pay more than a cursory interest in the bank’s affairs.
Portuguese law limits the number of positions that directors can accumulate so of the government’s proposed 19 names, only eleven could be approved by the European Central Bank.
The government then decided to change the law so its original cronies could be appointed. It was only when the President of the Republic of Portugal let it be known that there was no way he would approve such a cynical move, was this farcical chain of events halted.
At least half of the newly injected funds will be swallowed up to cover bad loans, with much of the remainder to follow as the true scale of the incompetence and corruption is revealed and billions in bad loans are accounted for.
