By Judith Ugwumadu | 4 August 2014

The European Commission has said Portugal’s €4.9bn rescue package to the troubled Banco Espírito Santo was needed to restore confidence in the country’s financial stability and ensure the continuity of services.

The package, which was agreed at the weekend, split BES into a ‘good bank’ and ‘bad bank’, under the Banco de Portugal central bank's Resolution Fund. The good bank will be put under the name Novo Banco, which will hold all the good assets and continue to protect depositors, while the bad bank will hold the problem assets.

But due to shortfall in the Resolution Fund, it has borrowed €4.4bn from the Portuguese state to see through the deal. An additional €0.5bn will be generated from levies on the banking sector.

Endorsing the bailout, the European Commission said today that a ‘disorderly’ resolution of BES could create a serious disturbance in the Portuguese economy and the creation of the new bank was ‘suitable to remedy that disturbance’.  

‘The adoption of this resolution measure is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential adverse systemic effects,’ the commission stated. It also confirmed that the deal does not breach EU state aid rules.

On July 30, BES – Portugal’s third largest lender – posted a €3.5bn loss for the first half of the year driven by exposure to debts of its parent company Espirito Santo Group.

Portugal only just succeeded in turning around its public finances and exited its three-year ‘troika’ bailout programme in May.