The troubled lender Banco Espírito Santo appeared on Sunday to be headed for a bailout financed by Portuguese taxpayers, in a test of Portugal's resilience and the ability of the eurozone to absorb another banking crisis.
The Bank of Portugal, the country's central bank, was expected to announce a rescue just days after it had offered assurances that Banco Espírito Santo could raise enough money from private investors to recover from a first-half loss of 3.58 billion euros, or about $4.8 billion, announced last week.
As part of a plan expected to be announced late on Sunday, the Portuguese government would inject more than €4 billion into the bank, which would be split in two, according to a person with knowledge of the discussions. One unit would house deposits, loans that are likely to be repaid and other healthy assets. Banco Espírito Santo's problem loans and other liabilities would be sequestered in a separate bank.
Banco Espírito Santo shareholders would probably lose all their money under the plan, but some holders of the bank's debt would be assigned to the unit with the healthy assets, the person said, and stand a chance of recouping at least a portion of their investments. The largest shareholders include Espírito Santo Financial Group, one of the holding company's of the Espírito Santo family that has been a dominant force in the country's economy for decades, and Crédit Agricole, one of France's biggest lenders.
Portuguese and other authorities have been investigating potential accounting fraud and abuse of privileged information in Portugal, Luxembourg and other financial centers used by the Espírito Santo family, which has run the bank for generations. The family's interests span finance, property, energy and health care assets in Portugal, Brazil and other countries.
The bailout is a setback for Portugal just months after the country emerged from a €78 billion, three-year bailout financed by the European Union and the International Monetary Fund. The country was one of those hit hardest in the eurozone debt crisis but won plaudits from its creditors for cleaning up its public finances and bringing its economy out of recession.
The near-collapse last week of Banco Espírito Santo, one of Portugal's largest lenders, unnerved investors, but it appears that Portugal will be able to afford the rescue.
The market interest rate, or yield, on Portuguese 10-year bonds rose only modestly on Friday, to 3.7 percent, amid speculation that the government would have to step in. The yield is far below rates of more than 15 percent seen in 2012, when there were serious doubts whether the eurozone would be able to survive.
Portugal has sufficient reserves, about €15 billion over all, according to a recent report by Moody's Investors Service, the credit rating agency. Portugal still has available just over half of the €12 billion that was allocated to rescue banks, as part of the €78 billion international bailout.
In fact, during the Portuguese crisis, Banco Espírito Santo was the only major listed bank not to ask for any rescue funding. The decision was seen at the time as a sign of solidity, but has more recently raised suspicions that the bank did not ask for help because it was "doing everything possible not to open their accounts," said Antonio Roldan Mones, an analyst at the Eurasia Group in London.
Banco Espírito Santo's €3.58 billion loss for the first six months of 2014 was the largest ever for a Portuguese bank.
As part of the loss, the bank was forced to set aside €4.25 billion for potential losses, attributed primarily to its exposure to its corporate parent, Espírito Santo International, which missed payments on some debt in July, and other parts of the Espírito Santo group.
The bank's stock has been under pressure since late May, after the disclosure that an audit by the Bank of Portugal found that Espírito Santo International was in "serious financial condition."
But its problems became far clearer in early July, after one of the family's companies failed to pay back a loan on schedule, in that way also revealing a convoluted corporate structure in which the bank was used by the Espírito Santo family to extend loans to prop up shaky industrial assets.
Banco Espírito Santo and the Bank of Portugal, the country's central bank, did not immediately respond to requests for comment on Sunday night.
The European Commission was "closely monitoring" the situation and was in touch with the Portuguese authorities, a spokesman said on Sunday. A spokesman for the European Central Bank, which will assume overall responsibility for overseeing eurozone banks in November, declined to comment.
Concerns about the bank unnerved European investors in mid-July, briefly forcing the postponement of several planned initial public offerings and debt deals. The PSI-20, the main stock index that tracks stocks traded in Lisbon, closed down 3 percent on Friday, when trading in the bank's shares was suspended. The index is off 16.6 percent since June 1.
In July, Ricardo Espírito Santo Silva Salgado, the family patriarch and former head of Banco Espírito Santo, was arrested and ordered to post bail of €3 million as part of a money-laundering and tax evasion investigation.
His arrest came only days after he stepped down from the bank. He was succeeded by Vítor Bento, an outsider favored by Portugal's central bank.
Last week, the bank said that to cover possible losses on credits granted without proper internal clearance, it needed to raise at least €856 million. Banco Espírito Santo said it would "ensure the bank is reimbursed for losses caused as a result of any potential illegal behavior."
In the first half of the year, the bank was also forced to take a provision to write-off interest on loans by its subsidiary in oil-rich Angola. The Angolan unit handed out loans equivalent to 220 percent of its deposits, leading the Angolan government to offer €4.2 billion in guarantees last December.
Last week, before Banco Espírito Santo reported its results, the Bank of Portugal said it was confident that private money, rather than a public rescue, would cover any shortfall. At the time, Banco Espírito Santo's loss was expected to be about €3 billion.
Banco Espírito Santo provides something of a preview of what may happen in October when the European Central Bank discloses the results of an exhaustive review of bank holdings in the eurozone. The review is intended to uncover precisely the kind of hidden problems that have undone Banco Espírito Santo.
The central bank review is expected to expose an unknown number of other banks with problem loans or other woes that they have failed to disclose to regulators or shareholders. There has been concern that the central bank's findings could destabilize the eurozone financial system. The European Union still lacks a comprehensive system for dealing with troubled banks, meaning countries must finance their own bailouts.
Chad Bray contributed reporting from London, and Raphael Minder contributed reporting from Tegernsee, Germany.
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