Portugal fights bank collapse

BY Matt Atkins

To the relief of anxious investors, Portugal’s central bank has announced measures to prevent the collapse of one of its biggest lenders, Banco Espirito Santo (BES). On Sunday 3 August, the board of directors at Banco de Portugal laid out plans for the €5bn rescue of BES, pulling it back from the brink and easing fears of contagion across Europe’s banking sector. The announcement comes days after the Banco de Portugal offered assurances that BES could raise enough money from private investors to recover from a first-half loss of €3.58bn.

The plan will see BES split into two. Problem assets will be held by the ‘bad bank’ BES. The remaining assets will be held by a ‘good bank’ – the newly formed Novo Banco, run under the supervision of Banco de Portugal. Novo Banco will be made up of BES’s core business of taking deposits and lending to home-buyers and companies. The bank will be receive an initial €4.9bn cash injection from Portugal’s bailout fund and eventually be sold off, with the proceeds used to pay back the loan.

As yet, it is unclear what will happen to the ‘bad bank’, most of which relates to other businesses in the Espirito Santo Group, including tourism, health and agriculture. Shareholders and creditors have been warned, however, that they may stand to lose all of their money.

Banco de Portugal has said customers of BES will be able to conduct transactions normally, and employees will be transferred to the new entity, which will retain the company logo.

“For our customers and staff only one thing has changed — their bank is now stronger and safer than it was before,” said Victor Bento, who will head Novo Banco. “The key uncertainties that have been hanging over the institution for some time have now been removed.”

Press Release: The application of a resolution measure to Banco Espírito Santo, S.A.

Argentine default deal falls through

BY Matt Atkins

Latin America's third-biggest economy Argentina has defaulted for the second time in 12 years, after failing to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.

Argentina had sought in vain to gain a last-minute suspension of a ruling by US District Judge Thomas Griesa in New York to pay holdouts $1.33bn plus interest. Judge Griesa ruled Argentina could not service its exchange debt unless it paid holdouts at the same time.

The consequences for the struggling economy are dire. Even if the default is a relatively short one, Argentina will see raised borrowing costs, further pressure on the peso, and a drain on foreign on reserves. The default will also pour fuel on the country’s soaring inflation rates.

While the current situation is bad enough, Argentina has faced worse. Today’s troubles are a world apart from the crisis of 2001, when the economy collapsed, causing millions to lose their jobs. This time around, while the country is already in recession, the country’s government is solvent. It must now attempt to extricate itself from its obligations as quickly as possible to avoid further harm to the economy.

Argentina’s failure to strike a deal with hedge funds will not have any great impact on the global economy. The country has been isolated from global credit markets since its 2002 default on $100bn. US ratings agency Standard & Poor's has downgraded the country's long- and short-term foreign currency credit rating to ‘selective default’, which will stand until Argentina makes its overdue 30 June coupon payment on its discount bonds maturing in 2033.

News: Argentina declared in default by S&P as talks fail

Russia pays price for playing dirty

BY Matt Atkins

Shareholders of the now defunct oil giant Yukos celebrated on Monday after an international arbitration panel ordered Russia to pay $50bn in damages for bankrupting the company.

The Hague court said Russian officials had manipulated the legal system to bankrupt Yukos, and jail its founder, Mikhail Khodorkovsky, for 10 years.

The court of arbitration rejected the Kremlin’s argument that the asset seizure was due to unpaid taxes, and described Russia’s actions as “devious and calculated expropriation". The Russian finance ministry has hit back, saying said the ruling was "flawed", "one-sided" and "politically biased". The ministry added that the Permanent Court for Arbitration in The Hague "had no jurisdiction to consider the questions it was given". The country is expected to appeal against the ruling.

The claim against the state was filed by a subsidiary for the financial holding company GML, once the biggest shareholder in Yukos Oil Co. "The majority shareholders of Yukos Oil were left without compensation for the loss of their investment when Russia illegally expropriated Yukos," said GML's Executive Director Tim Osborne. "It is a major step forward for the majority shareholders, who have been battling for over 10 years for this decision."

Responding to the news, Mr Khordorkovsky, who was at one point Russia's richest man, said it was "fantastic" that shareholders were "being given chance to recover assets". Mr Khodorkovsky forged  Yukos into Russia's largest investor-owned oil company following the collapse of the Soviet Union. He was arrested in 2003 and spent a decade in jail after being convicted of fraud and tax evasion but was pardoned last December. At the time of his arrest, he had been seen as a potential political rival to Vladamir Putin.

The question now is whether Russia will pay up. The Kremlin denies any wrongdoing, and payment of the fine under the ruling would prove an acceptance of defeat. Even if the state does not voluntarily accept the ruling, it can be enforced by shareholders seizing assets abroad. Shareholders of GML, however, have said that they are prepared to discuss the matter with Russia, according to a company spokesman.

News: Yukos shareholders say would talk to Russia over $50 billion compensation

Mt. Gox granted Chapter 15 protection

BY Matt Atkins

Mt. Gox, the infamous Tokyo-based bitcoin exchange, has gained court approval to start Chapter 15 bankruptcy proceedings in the US. The development should prove a boost to a Japanese investigation into the loss of 650,000 units of the digital currency, and pave the way for the company to complete the sale of its business.

Once the leading bitcoin exchange, Mt. Gox was forced to cease trading and close down its website in February 2014 when the company lost 700,00 of its customers' bitcoins, along with 100,000 of its own, worth an estimated $473m. Mt. Gox blamed a prolonged hacking attack for the loss, though it subsequently found 200,000 bitcoins in an old-format digital wallet.

Mt. Gox sought court protection in Japan in February. The Japanese court put the company into liquidation in April and appointed a trustee to investigate the disappearance of the bitcoins. The exchange applied for Chapter 15 protection in the US on 19 March to prevent US customers who had filed a class action lawsuit from seizing its US assets and demanding evidence from executives. US Bankruptcy Judge Stacey G. Jernigan said, on 17 June, that she has “ample legal authority” to accept the US filing and recognise Mt. Gox’s Japanese bankruptcy as the foreign main proceeding. US and Canadian customers will split the 200,000 bitcoins held by Mt. Gox and share in a 16.5 percent stake after Mt. Gox is sold.

Mt Gox began life as a website for users of Magic: The Gathering Online, allowing them to trade cards like stocks. In July 2010, the site was re-launched as an exchange for trading bitcoin and regular currencies. Its short life was chequered with security breaches, trading suspensions and lawsuits before its eventual collapse.

News: Failed bitcoin exchange Mt Gox gets US bankruptcy protection