Credit Default Swaps

Bank Resolution in Greece

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The result of Sunday’s referendum (July 5, 2015) which rejected the latest proposed bailout by the European authorities was unequivocal. The next steps in this crisis are far less clear, ranging from a swift renegotiation of the terms of the bailout together with an injection of liquidity into the Greek banking system in the most benign scenario to, at the other end of the spectrum, Greece exiting the Eurozone and attaining “pariah status” in the international capital markets.

In this client alert we focus on one aspect of the issues facing Greece – the liquidity crisis facing the Greek banks. We discuss bank resolution procedures available to the Greek authorities.

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Implications for the Imposition of Capital Controls in Greece

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Introduction

Following the recent event over the weekend (27/28 June 2015), we set out below a short guide on the current status in Greece.

Background

Months of negotiations on a deal to restructure Greece’s debts appear to have failed. Greek Prime Minister Alexis Tsipras has called a referendum for 5 July 2015 on the draft bailout proposals (the “Proposals“) from the EU[1]. Mr Tsipras government will campaign against the Proposals which required a number of measures relating to VAT increases, budgetary restraints, pension reforms and privatisation measures.  On Saturday 27 June 2015 Eurozone finance ministers refused to extend the current EU bailout programme which expires on 30 June 2015. In response on Sunday 28th July 2015 the Greek government announced the imposition of capital controls.

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The Nationalisation of Banco Espirito Santo – The Aftermath

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The Bank of Portugal announced on Sunday 3 August 2014 that it applied its powers under the Decree law No 31/2012 of 10 February 2012 (the “Resolution Law“) to split Banco Espirito Santo (“BES“) into a “good bank” and “bad bank” (the “Restructuring“) and to transfer certain of BES “good” assets and liabilities to “Novo Bank”.

Following the release by BES of its half year results, it was apparent that the financial stability of BES was more questionable than many had suspected.  A rapid decline in BES’s share and subordinated bond price followed and on the weekend of 2 and 3 August, the Bank of Portugal must have come to the conclusion that its earlier plea for a private sector recapitalisation was unrealistic. On 3 August, the Bank of Portugal publicly announced the split which left certain assets with BES, which also retained the subordinated debt. The senior bonds and many of the quality assets of BES were transferred to Novo Bank.

In view of the European Central Bank’s ongoing asset quality review, the BES case was seen as a test case in Europe. This client alert looks at some of the recent history of the Espirito Santo group and BES and considers what will happen in the aftermath of the nationalisation of BES and following the filing by certain Espirito Santo holding companies for controlled management (gestion contrôlée) in Luxembourg.  Specifically, this client alert considers:-

  1. the background and recent history relating to BES and the Espirito Santo group;
  2. the limited legislative tools available to the Bank of Portugal under the Resolution Law;
  3. what the effects of the use of the Resolution Law will have on BES stakeholders; and
  4. what the next steps are likely to be in relation to Espirito Santo International (“ESI“), Rio Forte Investments (“Rio Forte“) Espirito Santo Financière SA (“ESFIL“) and Espirito Santo Financial Group (“ESFG“) that have filed for a controlled management process in Luxembourg.​

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