International investors raise concerns over EU recovery fund, after BES scandal

International investors raise concerns over EU recovery fund, after BES scandal
Credit: ECB

This article is part of an article series about Europe's Recovery and Resilience Facility. It has been enabled thanks to the kind support of Recover Portugal.

The European Central Bank (ECB) is coming under a wave of fresh criticism over its role in a Portuguese banking scandal that stretches back to 2014.

‘Recover Portugual,’ a campaign group established to represent several institutional investors who found themselves on the losing end of the Banco Espirito Santo (BES) failure seven years ago, say that the ECB still has questions to answer for the way in which it intervened in the bank’s downfall.

The ECB intervened in the Portuguese banking failure after the country’s central bank had restructured BES following heavy losses of nearly $5 million in the first six months of 2014, transferring toxic assets into a new formation, the Novo Banco.

But when Novo Banco starting experiencing difficulties, the ECB tasked the Portuguese central bank with reducing Novo Banco’s liabilities, and if it failed to do so, it would place the organization into liquidation.

The Portuguese central bank did indeed reduce the liabilities, but only by retransferring €2.2b worth of assets belonging to international institutional investors back into the toxic BES. The move appeared to appease the concerns raised by the ECB.

Meanwhile, reports in Lisbon suggest that Recover Portugal is now levelling accusations directly at the ECB for the role they played in the fiasco.

The Diario de Noticias reports that the group claims a former director of the Portuguese Central Bank has e-mail correspondence confirming that the ECB de facto approved the transfer decision, and “rejected other options that Banco de Portugal was considering before the transfer decision was accepted, including a suggestion to impose a discount of ten to twenty percent on transferred notes".

The five retransferred notes were chosen because they were held by foreign investors and governed by Portuguese law, and primarily held by institutional rather than retail investors. This meant that the Portuguese courts could control the pace of litigation and discovery that followed this controversial decision.

“Both the Bank of Portugal and the ECB recognized that this option would place Portuguese financial institutions in a weaker position by rejecting or deferring the repayment of creditors during the recapitalization of Novo Banco,” Recover Portugual informed the Diario de Noticias, suggesting an abuse of authority and corruption at the highest levels of the Portuguese and European banking ecosystem.

The increased scrutiny on the role the European Central Bank played in the whole debacle was recently raised by stakeholders in Brussels, including allegations of negligence that have emerged from one Portuguese MEP in particular.

Speaking at a recent policy event by The Brussels Times, MEP Nuno Melo claimed that the ECB has consecutively mismanaged its affairs, overlooked several instances of corruption, and failed in its effective supervision of the Portuguese banking crisis.

In addition, Melo has hit out at a culture of negligence in the recruitment of high-level officials in at the European Central Bank, particularly noting concerns with the appointment of Vice-President of the ECB Vítor Constâncio, who was elected in 2010 after having held the role of the Govenor of the Bank of Portugual.

“For years, the governor of the Bank of Portugual was incapable of sufficient banking supervision. In 2010, he was chosen to be the Vice-President of the European Central Bank, meaning that if you fail, you are promoted,” Melo said.

“I was the only MEP opposing this nomination, but it happened anyway,” he added. “You cannot say that you don't have a risk if you don't have the best people in the right places.”

The entire BES episode and concerns over the trustworthiness of Portuguese national authorities as well as EU institutional ones, has recently garnered more attention in Brussels, in the context of the distribution of EU recovery funds as part of a landmark €672.5bn package.

Stakeholders from the international investment community, who will be called upon to help finance the fund, are concerned that Portugal’s track record in abusing banking crises to discriminate notes belonging to foreign investors does not spell confidence for international investors, who need legal certainty and enforcement of the rules and fair and prompt trials when there’s a dispute.

For its part, Portugal will be set to receive €13.9 billion in grants and €2.7 billion in loans until 2026, following the European Commission’s approval of the country’s recovery plans. Oversight for ensuring the correct spending of the recovery funds will fall to national authorities as well as an independent monitoring body. The European Commission,  Parliament and the Court of Auditors will also play a key role in closely monitoring spending of the NextGenEU funds to ensure targets are met and fraud is avoided.

The Commission will also put in place a system for policing the outlay, and the newly established European Public Prosecutor’s Office will have powers to investigate and prosecute fraudulent spending of EU funds.

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