Banco Espirito Santo 'to be rescued' by Portugal

The use of the bank resolution fund – which will eventually have to reimburse the state after recouping money from future investors – is aimed at limiting the political fallout of using taxpayer money to prop up a bank at a time when Portugal is only just emerging from a deep economic downturn, they added.

The scramble to save Portugal’s largest-listed bank by assets comes after BES last week posted a deeper than expected €3.6bn loss and said it was exposed even more deeply than originally thought to a cascade of bankrupt companies belonging to its founding Espirito Santo family.

Those disclosures, and the announcement that authorities were looking into possible illegal activity at the bank, have scared away investors ahead of a planned capital increase by BES over the next few weeks.

After a tumultuous week in which BES shares lost 75pc of their value, authorities at the government and Bank of Portugal realized that using public funds was the only solution for now, people familiar with the authorities’ thinking said.

Under the plan being hatched on Sunday, BES would be split into a "bad bank" holding toxic assets mostly related to its exposure to the Espirito Santo family, and a healthy part that would be taken over by the bank resolution fund and eventually sold off to private investors, according to the sources.

The fund, which is financed by all banks in Portugal and has representatives of the country’s central bank and government on its board, had just 185 million euros as of the end of last year. Under the rescue plan, it will receive at least half of the country's left-over bailout money, which it will use to help BES.

Proceeds eventually raised from investors would then repay the fund, which will in turn repay the state. Under the scheme, holders of the lender’s subordinated debt could lose at least part of their investment, a source said.

Portugal exited its €78bn international bailout in May, and still has €6.4bn from an original €12bn bank recapitalization line received under the program.

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