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The document that the Observer recalls here does not contemplate the scenario that the State does not finance the Resolution Fund if necessary, and it has been in the three years in which there have been economic injections and even establishes that if it wants to denounce the entity and demand the reimbursement of amounts assigned by virtue of this agreement, this “cannot affect the capacity of the Resolution Fund to comply with the financial obligations assumed in the sale contract.” This return could only take place after a final judicial or arbitration decision.
The loan of up to 850 million euros per year to the Resolution Fund works as a kind of advance that banks will pay over the next decades. The loan argument has been used by the Government to support the thesis that there is no taxpayer money involved in financing the Novo Banco. The State charges the Resolution Fund its reference rate on the 5-year debt (currently negative at -0.179%) and applies a commission of 15 basis points, that is, the final rate is slightly negative at this point – which constitutes Favorable conditions for the Resolution Fund.
The Resolution Fund then adds this maximum annual loan to the contributions of the banks operating in Portugal (which last year amounted to 180 million euros, with Caixa Geral de Deposit being the largest contributor) and other income (such as sales of assets of Oitante, vehicle of the former Banif, which can make a significant contribution this year) and injects the amount requested by Novo Banco.
It has always been assumed that this would be the last year that this capital mechanism would inject capital into Novo Banco, despite the fact that the private shareholder has until the end of 2025 (extendable until the end of 2026) to continue this process. Nothing forces this to be the last stretch – what does not change is the maximum total value: 3,890 million euros, of which about 912 million left (since the alteration of the accounting rules used by Novo Banco that may reduce this amount is still pending arbitration decision). In 2018 it was 792 million euros. In 2019, it was 1,149 million euros. In 2020, it was 1,035 million euros.
In theory, it may be possible to ease the burden for this year, leaving some value for future years, perhaps to the point of no new loan needed Treasury Resolution background. Everything will depend on the amount that is needed: in the results of the first semester it was already established that the use of the Resolution Fund by Novo Banco will be 176 million, it remains to be seen what will be the needs caused by the sales of assets that will be carried out in the second semester of the year.
Marques Mendes: “The Government will not enter a single euro in the State Budgets for the New Bank”
But with the restrictions to carry out these operations, even due to the market conditions generated by the pandemic, it is likely that the losses generated in this way will be lower than those registered in the previous two years. Although Novo Banco has decided to recognize losses in restructuring funds which can go to the so-called contingent capital mechanism. However, considering what happened in the other transfers, it is unlikely that the Resolution Fund will be able to meet the new capital call – which the president of Novo Banco has already warned will happen – only with its own resources.
If the amount exceeds the income of the Resolution Fund and an additional amount is required, and if the Treasury is unable to make a new loan, the Resolution Fund may, as directed by Marques Mendes, obtain loans in the private market. There, the entity could save the commission of 15 basis points for the Treasury (which last year corresponded to about 3 million euros) and could even finance itself in the markets using the classification and the financing costs of the Republic. But it will be more expensive, unless the financing is for shorter terms.
According to sources heard by the Observer, the most obvious solution if the State fails the call will be turn to national banks to finance a loan. This solution was used in the resolution of Banco Espírito Santo in which the recapitalization costs were financed by the State and the bank. From the point of view of the beneficiary, Novo Banco and the shareholder Lone Star, the important thing is that the money arrives.
But that would require some work and eventually additional guarantees. Now, it is true that the Republic has had easy access to the international market – thanks to the stimulus programs of the European Central Bank – and is in a position to issue five-year debt with negative interest rates. But then, it remains to be seen with what term the Resolution Fund will be financed, because the State recently issued 25-year debt at a rate slightly above 1%.
In other words, issue debt with international investors / banks -as Luís Marques Mendes indicated that is on the table- it could be more expensive for the Resolution Fund if the intention were to obtain financing with longer terms, in line with the terms (of several decades) that banks have to replace the money . On the other hand, this financing should be provided on market terms, if it could generate doubts in the European Central Bank or in the auditors.
Another hypothesis, supported by industry sources heard by the Observer, is that banks could make a bigger contribution next year this year for the National Resolution Fund, which could help provide the additional amount needed.
And can banks do that? “The conditions have, it would be something that would have implications, but the conditions would be”Said a source from the sector, highlighting that any decision of this type would have to be approved by the European authorities, not only the Directorate General for Competition (DGComp) but above all, in this case, the European Central Bank, banking supervisor.
However, another source heard by the Observer eliminates this scenario, in the name of safeguarding financial stability. The contributions of the banking sector already weigh on the accounts of the institutions, even more so in a scenario close to an increase in non-performing loans that may impose more capital needs. Although they are prolonged, the moratoriums that suspended the credit installments will have to end and that is where the impact on the banking system will be perceived. Hence, it is indicated how to anticipate the contributions to Novo Banco that may be necessary to respond to another future crisis in the sector. unwise.
But nothing prevents banks from participating in a financing effort – with loans – that can be agreed (in the same terms that Marques Mendes indicated that one could think of foreign banks).
Another option offered by the SIC political commentator would be use of a European financing facility – but it is not clear what options and instruments exist. Any recourse, for example, to the lines of the European Stability Mechanism would be economic options but, in the end, they would always end up taxing the public accounts because the State would have to ask for those values and then write them down in the Budget – which is, by the way, the “red line” that is being drawn on the political plane.
This is, incidentally, an unavoidable point: Any of these options will always have an impact on the public deficit., because the Resolution Fund is a body included in the perimeter of public administrations, that is, the money comes from where it comes from, when the Resolution Fund injects capital to Novo Banco it is always recorded as an expense that goes to the calculation of the public deficit and that must be financed with public debt.
The sources heard by the Observer discard, at this stage, the idea that the State contributes to the solution without directly transferring the money to the State Budget, but using other mechanisms that may escape parliamentary scrutiny or be considered not very transparent.
When asked by the observer what alternatives might exist, that is, in terms of European aid, the Ministry of Finance did not comment.
In an interview with Expresso, in last Saturday’s edition, Catarina Martins elaborated on what the Left Bloc wants or does not accept to see in the State Budgets for 2021. “In the OE, it is enough that there is no transfer to Novo Banco or authorization to transfer to the Resolution Fund.” But this “is not enough,” said the Bloc coordinator.
The Resolution Fund, in BE’s opinion, cannot borrow more. “In the next State Budget, we do not want any type of injection in Novo Banco, nor do we want a direct transfer from the OE to the Resolution Fund, nor of course that the Resolution Fund is in debt to inject money into the bank, because the deficit always goes ”. That is, the blockers face only one possibility: to denounce the contract with Lone Star, after a new audit with a public commission.
