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EU and Portugal reached an agreement over recapitalization

EU and Portugal reached an agreement over recapitalizationThe European Union and Portugal have made an initial agreement of ailing state-owned bank Caixa Geral de Depositos SA (CGD), an important step toward cleaning up the country’s troubled banking sector.

The plan, agreed on Tuesday,is aimed at returning the bank to long-term health through cost cuts, improved efficiency and de-risking measures.

Portugal will inject up to €2.7 billion ($3 billion) in state funds and nearly as much in debt and equity, according to the state’s Finance Ministry and a spokeswoman for the European Commission, the EU’s executive branch.

Caixa Geral also has committed to sell €1 billion in subordinated debt to private investors. Portugal also will transfer its shares in a subsidiary of Caixa Geral called ParCaixa to the bank and convert about €900 million of contingent convertible bonds, known as CoCos, into equity.

Portugal’s capital injection into Caixa Geral won’t be considered state aid, the commission spokeswoman said.

“The €2.7 billion capital hike will force a change in the public debt profile, but the shoring up of the country’s banking system is worth more for the country,” Portugal’s Finance Minister Mario Centeno told journalists on Wednesday in Lisbon.

The plan is yet to be formalized and approved by the College of Commissioners.

Portugal has a debt load of about 130% of economic output and is trying to whittle down its budget deficit to meet EU targets.
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