The European Commission is standing by its approval last summer of Portugal's €4.9 billion ($6.1 billion) rescue and subsequent breakup of Banco Espirito Santo SA as a legal challenge from Daniel Loeb's Third Point LLC and other miffed bondholders looms.
"If our decision is appealed, the Commission will defend its decision in court," the Commission's competition spokesman, Ricardo Cardoso, said via e-mail.
The appeal was reportedly filed with an EU court in Luxembourgby 16 plaintiffs including Third Point, Brazilian bank BTG Pactual SA, Bennett Offshore Investment Corp. and GoldenTree Asset Management LP, though Cardos said the Commission has yet to receive formal notification of the action.
The dispute stems from the EC's clearance last August of Portugal's plan to break up Banco Espirito Santo into a "bad bank" containing problem assets and an entity housing good assets called Novo Banco, with losses to be shouldered by shareholders and junior debtholders rather than taxpayers. At the time, the Commission ruled the rescue plan to be compatible with EU state aid rules.
But the complaint alleges that the EC may have been too hasty to reach a decision and had the obligation to open an in-depth inquiry.
"This is the first occasion, in the history of the financial crisis, that a rescue and restructuring measure for a financial institution within the EU has been notified to and approved by the Commission in the course of a single day," according to the complaint as cited in The Wall Street Journal.
Even with an expedited procedure a court case could drag on, potentially jeopardizing the sale of Novo Banco, and confidence in Portugal's banking sector just when policy makers are seeking to put the euro-zone banking system back on a solid footing with a new regulatory setup.