Anger and threats of lawsuits follow Bank of Portugal’s decision to ‘dump’ Novo Banco bonds

As the full implications of the Bank of Portugal’s decision to send almost €2 billion of senior bonds down the swanny to help Novo Banco “look better” have started to hit home, anger and threats of legal action have escalated.

As Bloomberg Business points out this morning: “In a European market that hardly gets out of bed from the week of Christmas through the new year” the decision, announced by BdP governor Carlos Costa yesterday (see: http://portugalresident.com/bank-of-portugal-%E2%80%9Ccleans%E2%80%9D-novo-banco%E2%80%99s-accounts-to-the-tune-of-%E2%82%AC1985-billion), has created “a massive problem”, and, not surprisingly, investors caught up in the shift of senior bonds into effective oblivion “aren’t happy”.

As one CEO whose company has lost out told the financial news website, the decision “flies in the face of the pari passu (literally “equal footing”) notion that demands creditors be treated equally and without preference.

“We had assumed that … anything could happen – even events that we had never seen before,” Mark Holman of TwentyFour asset management, a London-based investment manager told Bloomberg. “However, we did also assume that certain protocols would be adhered to. The equal ranking language that sits in every prospectus is a core value that we never thought would be broken.”

The fact that BdP “claims the right to change all the rules” will open the doors to “a great deal of legal wrangling in the future”, he vowed, “along with increased uncertainty. It will also hinder the recovery of the good banks in the future if bond investors cannot trust the basic rules in a prospectus, or the hierarchy of losses,” he warned.

Within hours of the announcement, Portugal’s association of market investors (ATM) had declared the decision “manifestly illegal” and were preparing for court action.

And in New Zealand, financial websites quickly cottoned on to the fact that the decision has “made things even worse” for the country’s Superannuation Fund locked in a major legal fight with Novo Banco already, trying to wrestle back €150 million jettisoned into the BES bad bank early on in this never-ending story, along with over €700 million of ‘investment’ by Goldman Sachs.

As one commentator put it, this is the “newest form of systemic bank crime. The ‘bail-in’ is the ultra-insane culmination of the ‘too big to fail doctrine’.

“By this doctrine, any and all assets, public or private, in our financial system can and will be sacrificed (stolen by the Big Banks) to prevent any of the Big Banks from ‘failing’ – that is going bankrupt as a consequence of their own reckless gambling”.

And in private homes here, investors woke up to unpleasant telephone calls.

“I got a call at 9am from the bank to tell me I had lost €100,000,” 72-year-old Fernando Esteves told the nation’s tabloid Correio da Manhã.

“Contrary to what the Bank of Portugal has said, there are private investors who have been affected by the decision to recapitalise the bank,” explains the paper.

Esteves, for example, invested his money in BES senior bonds four years ago.

Interviewed by the paper’s economic journalists today, he described the BdP move as “robbery”.

Novo Banco needs recapitalisation, he agreed, but “not at the cost of private investors”.

Elsewhere, others damaged by the ‘recapitalisation’ include investment funds like Black Rock (down €254.1 million), PIMCO (€228.6 million), UBS, Allianz and Credit Suisse.

natasha.donn@algarveresident.com