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

Wednesday, 16 June 2021

The BES scandal seven years ago, which led to intervention by the Portuguese government, is yet to be resolved.
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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.

A group of international investors have raised concerns over the dispensation of funds as part of the EU’s €750 billion recovery package, citing ongoing issues with the 2014 Banco Espírito Santo (BES) scandal in Portugal, and suggesting that legal action could be levelled against the European Commission should it fail to act.

The concerns relate to the BES case seven years ago, in which the Portuguese central bank intervened to support the failing Banco Espírito Santo, after the latter had experienced losses of nearly $5 million in the first half of the year.

The Portuguese central bank imposed a restructuring which involved maintaining bad assets in BES and transferring stable funds to the newly created Novo Banco.  However, Novo Banco itself then started faltering, leading the European Central Bank and the EU banking Union to call upon the Bank of Portugal to reduce Novo Banco’s liabilities.

In response, the Portuguese central bank then cherry-picked €2.2bn worth of bonds from Novo Banco and retransferred them back to the toxic BES. All of these bonds were held exclusively by foreign and institutional investors, who therefore faced heavy losses as a result of the move.

International investors who found themselves at a loss have since attempted to find recourse through the Portuguese legal system, which has so far bore no fruit, despite the lost notes being the only ones subject to Portuguese, rather than international, law.

Recover Portugal, a campaign group established to raise awareness to the case, says that there has been “very little progress in court proceedings and there has been no final decision issued by a first instance administrative court.”

Moreover, in a statement on the group’s website, investors said the 2014 BES case has “continued to damage the reputation of Portugal as a safe destination for foreign investors,” at a time which the EU is seeking to raise funds on international markets in order to finance the bloc’s recovery from the coronavirus pandemic.

As a result, the group has called for investors to be compensated for their losses and has also called for “guarantees of redress and equitable treatment before considering partial funding of the EU recovery fund.”

“We want to recover the more than €2 billion that was taken from us. The interests of investors must be protected, and we must ask the Portuguese government to solve the Novo Banco problem as soon as possible. This is what many investors are waiting for,” Recover Portugal said.

Portuguese news agency Lusa reported that Recover Portugal do not discount taking legal action against the European Commission, on the grounds that investors feel as though their plight hasn’t be dealt with by national authorities expeditiously.

Today, the 2014 BES case is coming back to the fore, bearing in mind that the European Commission is now turning once again to foreign investors as a means to help the bloc finance its recovery from the coronavirus pandemic, as part of the €750bn bailout package.

A recently launched campaign video said that the BES scandal had almost appeared to be the ‘perfect crime’ until today, when the EU “has to turn back to the very same international investors” to raise the funds required for Europe’s recovery.

And, taking into account the previous losses suffered by international investors when bailing out Portugal, there is a degree of reticence this time around when it comes to stumping up the funds to finance the country’s recovery.

Portugal is set to receive a sizable portion of the bloc’s recovery package – with almost €14bn in grants and €2.7bn in loans coming its way. As part of the dispensation of funds, the EU has agreed on a ‘general regime of conditionality’ that ties payouts to compliance with the treaties, most relevantly with the Rule of Law.

And while the traditional outliers of Hungary and Poland have been under the spotlight when it comes to concerns in this area, there are those that believe Portugal has more to answer for, particularly when considering the BES scandal, alongside the fact that the country is currently chairing the Presidency of the EU Council, where it has had to shepherd along ongoing discussions with regards to the bloc’s recovery fund.

Meanwhile, the Commission’s 2020 Rule of Law findings have shed more light on causes for concern in Portugal, with the EU executive recognising an episode last year in which top judges were indicted in a case of “high level corruption, including peddling and money laundering,” as a result of maladministration over the allocation of judicial cases.

This led Portugal’s High Council for the Judiciary to apply disciplinary sanctions to two of the judges involved, and the High Council has recognised that the ‘perception of justice’ in the country is at a low.

The lack of confidence in Portugal’s judiciary is felt by citizens, the European Commission and the Council of Europe’s anti-corruption body GRECO, as well as investors.  In the eyes of international investors, with little progress in the Portuguese courts in the 2014 BES case, there are “dire questions about the seriousness of the country’s judicial system,” according to Recover Portugal.

This ‘direness’ is perhaps only reflected in the country’s need to receive the funds themselves. However, should the bailout money be forthcoming, a renewed sense of confidence from international investors will first need to be guaranteed.

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