Unlike how the US handled most of its banking crisis, with doing very little to stop the continued growth of major banks, Portugal is taking this failing bank and splitting it up into separate banks in order to correct its issues. Splitting up this bank will help to peel off the good portions of the business from those that are doing harm to industry and consumers.
The bank will be split into two entities, with its toxic assets isolated and its healthier assets regrouped in a new Novo Banco, Costa said.
Novo Banco will be controlled by the Resolution Fund set up by Portugal's banks as part of the conditions for a 2012 national bailout by the troika of the EU, IMF and European Central Bank (ECB).
In intervening to deal with the ailing bank, which recorded first-half losses of 3.57 billion euros last week, the Lisbon government is seeking to avoid contamination throughout its fragile economy and into the wider eurozone.
'There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system,' Costa said, evoking the risk of a payment default by BES which would endanger Portugal's financial system.
The 'bad bank' will remain in the hands of current shareholders, who risk major losses.
Under new European rules, shareholders and bond holders have to contribute to any bailout before the state puts in taxpayers' money.
The cash injection from the state is designed to stop savers pulling any more money out of the bank, and to assure them their money is safe, analysts said.
At one stage during on Friday trading, BES's market value sank by one billion euros in a single minute in reaction to the first-half losses, the worst ever recorded in the eurozone country.
The bank was plunged into turmoil last month by suspicions that its holding company, the family-run Espirito Santo International (ESI), covered up a 1.3-billion-euro hole in its accounts.
Then the bank's veteran head Ricardo Salgado was forced out before being arrested last Thursday in connection with money laundering allegations.
Fears that the bank's collapse could have serious consequences for Portugal, which only exited a 77-billion-euro EU-IMF rescue program in May, has worried global markets as questions resurfaced over eurozone debt.
Banco Espirito Santo share trading was suspended on the Lisbon bourse on Friday after a 75 per cent fall in value over the week.
To stop more panic selling, the Portuguese authorities plan to withdraw BES from the stock market on Monday, the Lisbon newspaper Diario de Noticias said on Saturday.
This is the first test of the new transitionary rules before a European banking union is put in place in 2016, when all banks will have to submit to supervision by the ECB to prevent taxpayers having to foot the bill for crashes.
Governments should not be able to profit from corporations. If a Corporation, that the government has no (monetary) interest in fails, the government never steps in to help them. Anytime a corporation of (monetary) interest to the government is in jeopardy or just failing in general the GOV steps in to protect their "asset".
Portugal has followed the American's lead, rescuing Banco Espirito Santo, and this is a bad idea. Artificially propping up financial institutions only leads to short term stability and this is not good for long term prosperity and growth. A bank without the means to self support will fail eventually, despite the intervention of the government, this is just delaying the inevitable.
No, it is not a good move for Portugal to rescue Banco Espirito Santo, because the banks need to fix themselves organically, through their own changed behavior, or the economies will never recover. All the U.S. has done by bailing out the banks is create another bubble. Ultimately the people will end up paying for it, not the big bank owners.