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The Novo Banco debacle and the rule of law in Europe

Page created: Friday, 19 January 2018 14:43 GMT

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Novo Banco

Portugal’s Banco Espírito Santo failed in 2014. The authorities responded by splitting it into a “bad” bank that would wind down over time and a “good” bank that would maintain the core operations. This new bank was appropriately called Novo Banco.

Then in December 2015, the Bank of Portugal effectively wiped out bondholders in Novo Banco. The actual losses were imposed in an extremely convoluted manner. The bonds were originally liabilities of Novo Banco but they were transferred to the bad bank. No longer linked to good assets, these bonds plunged in value.

Bondholders, including BlackRock and Pimco, launched legal action against the Bank of Portugal in April 2016, which is still progressing. Slowly.