Portugal to rescue its Banco Espirito Santo

Portuguese authorities are providing 4.9 billion euros ($6.6 billion) in an emergency rescue to prevent the collapse of ailing bank Banco Espirito Santo, one of the eurozone country's oldest and biggest financial institutions.

Bank of Portugal governor Carlos Costa said late Sunday the money will come from a special fund set up during the eurozone's recent financial crisis. The fund was created to help financial institutions in difficulty.The European Commission said on Sunday that Portugal's planned rescure of the bank was in line with EU state aid rules.

"The adoption of this resolution measure is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential adverse systemic effects," the Commission said in a statement.

The Commission said a disorderly resolution of BES could have created a serious disturbance in the Portuguese economy and that the creation of a temporary credit institution, holding deposits, senior debt and most of the assets, was a suitable remedy.

The move came after Banco Espirito Santo's share price lost around 75 percent of its value last week. The stocks crashed after the bank reported a record half-year loss of 3.58 billion euros as previously unreported debts came to light after an audit. The scandal involving the Espirito Santo family, one of Portugal's best-known families, has gripped public attention.

The Portuguese bank's hidden difficulties have spooked international markets, which fear the financial crisis that recently hit countries sharing the euro currency may not be over and more financial secrets remain to be discovered.

Banco Espirito Santo's healthy businesses, including its retail arm, will be spun off and put in a new bank called Novo Banco, which will keep the bank's current staff, Costa said. He said account holders' money was safe. The cash injection is a loan and will be repaid with interest, with no cost to taxpayers, Costa said.

The bank's toxic assets, meanwhile, will remain at Banco Espirito Santo, which will become a so-called "bad bank." He did not elaborate.

The Bank of Portugal, which regulates the country's financial sector, has acknowledged it was wrong to trust the numbers provided in recent years by Banco Espirito Santo. Some Portuguese politicians are demanding an inquiry into why regulators and auditors failed to spot the bank's problems.

Costa said the bank had violated financial rules and was guilty of mismanagement. He did not take reporters' questions after his televised late-night statement.

The bank is at the heart of the Espirito Santo family's tourism-to-health care business empire on four continents.

The scandal erupted in May after an audit found accounting irregularities. Later, unreported debts at the bank emerged. The Espirito Santo family's three main holding companies have in recent days requested bankruptcy protection.

Police suspect the bank's former boss, Ricardo Espirito Santo Salgado, of fraud, forgery and money laundering. Salgado was questioned last week and released on three million euros bail. He stepped down from his job last month.

The Espirito Santo family began its banking business in the 19th century. Before its recent problems, Banco Espirito Santo was the country's largest private bank.

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