Portugal may use state funds as part of BES hike, shares plunge

By Sergio Goncalves

LISBON (Reuters) - Portuguese authorities are considering using public funds to help keep the country's largest listed bank solvent, sources said on Friday, as the lender's plunging shares put its plan to raise new money from investors in doubt.

Banco Espirito Santo was still trying to convince investors to take stakes and shore up its finances in a fully private capital increase that should kick off soon.

Two sources with knowledge of the situation told Reuters, however, that Portuguese authorities consider the use of a "mixed solution", combining state aid with private capital, may be hard to avoid after the bank's massive loss to clean up its balance sheet, which some analysts fear could still be incomplete.

One source said BES is likely to need another 3 billion euros (£2.38 billion) after the 3.6 billion euro half-year loss it posted on Wednesday wiped out its capital buffers and reduced its solvency ratio below that required by the Bank of Portugal.

The scramble to save BES is the most dramatic fallout yet from a months-long saga involving the crumbling business empire of Portugal's most prominent Espirito Santo family, which founded the bank more than a century ago.

So far, five family companies have filed for creditor protection after defaulting on their debt.

Prime Minister Pedro Passos Coelho told reporters his government was closely following the situation but declined to comment on the prospects of state aid.

"Now the supervisor, the Bank of Portugal, has to monitor and propose what is needed," he said. "The government will take all measures necessary to maintain financial stability."

Portugal's securities market regulator CMVM suspended trading in BES shares on Friday afternoon after they plummeted 40 percent following a 42 percent drop on Thursday.

They were suspended awaiting new information from the bank, but CMVM did not specify when that could be.

With the market closed, BES has at least until Monday morning to reply.

A BES spokesman would not say when it was likely to provide new information nor whether it would spell out any concrete recapitalisation plan.

He would not comment on state aid, referring to Chief Executive Vitor Bento's statement on Wednesday that BES expected to raise private cash after some investors showed interest in taking significant stakes.

PROBLEMS IN MARKET

Not helping the bank's case is the fact that since it last pulled off a billion euro capital increase in early June, its shares have lost 89 percent of their value.

Investors began dumping the shares after Wednesday's revelations of massive losses, which were attributed largely to the bank's exposure to its founding family, and of potential illegal activity, which BES and regulators vowed to investigate.

Among the revelations were two letters of guarantee issued by the bank to creditors of the Espirito Santo group that were never registered in the lender's accounts.

"The market is concerned that there won't be enough private interest ... that the auditing by the Bank of Portugal could uncover more bad news," said Albino Oliveira, an analyst at Fincor brokers.

The Bank of Portugal has previously said it prefers a market solution, but it has a bank recapitalisation line available to guarantee BES solvency.

Government and central bank officials would not comment.

A third source said the Portuguese government last week liaised with officials of the European Central Bank to reassure them that it still has access to 6.4 billion euros to recapitalise its banks, if needed. The ECB will take over supervising large lenders across the euro zone on Nov. 4.

Portugal's two other major listed banks took almost 6 billion euros from the bailout line at the height of the country's crisis in 2012.

They have since started to repay the loans, and one of them, Banco BPI, has fully repaid its 1.5 billion euros owed to the state. The banks have also made hefty interest payments on those loans.

Although the leftist opposition has warned that using public funds to help a bank in the austerity-weary country would have political consequences for the government, analysts see sufficiently strong political arguments to justify state aid.

"I think all political and economic players understand that allowing BES to collapse would have a devastating effect on the economy," said Filipe Garcia, head of the Informacao de Mercados Financeiros consultancy.

(Additional reporting by Daniel Alvarenga, writing by Andrei Khalip; editing by Jane Baird)