Portugal seeks to shelter public firms from failing bank bail-ins

By Sergio Goncalves

LISBON, Sept 18 (Reuters) – Portugal’s government is seeking to give more protection to deposits by public firms and large institutions in case of bank failures that hit senior bond holders, Deputy Finance Minister Ricardo Mourinho Felix said on Monday.

Currently, institutional deposit holders with more than 100,000 euros ($119,550) are considered common creditors, the same as senior debt holders, when they are called to bail-in, or help pay for, a bank in trouble.

“With (our changes), the deposits will be clearly safer than senior debt. The goal is (higher) stability of the financial system and to make these deposits a safer savings instrument, so that there are no doubts about it,” Mourinho Felix told Reuters.

In Portugal’s 2014 and 2015 bank rescues, such deposits were already fully protected, but based on case-by-case decisions by the resolutions authority rather than a law.

Mourinho Felix said the proposed change follows May guidelines by the Bank of Portugal and the European Central Bank, and the added protection will be in the same mould as already in place in countries like Italy and Germany.

The draft bill should be ready in the next few weeks and the government hopes to have it approved in parliament by the end of the year.

“We are talking about public companies’ deposits in the Portuguese financial system, but also pension funds’ deposits, including the social security system and by the (state debt management agency) IGCP,” he said.

Mourinho Felix said the plan was not targeted at any specific cases such as Novo Banco, which was carved out of the 2014 collapse of Banco Espirito Santo, but would apply to all banks.

The country’s biggest bank collapse still haunts its financial system three years on as Novo Banco still runs the risk of being liquidated if an agreed sale to U.S. fund Lonestar fails.

The sale hinges on a so-called liability management exercise, or a heavily discounted bond buyback, that the bank has to perform first to generate additional capital worth 500 million euros.

A group of bondholders has opposed the terms, threatening to block the operation. ($1 = 0.8365 euros) (Writing By Andrei Khalip, editing by Axel Bugge/Jeremy Gaunt)