Portugal is preparing to bail out its biggest bank by assets Caixa Geral de Depositos (CGD) which is currently ailing due to bad loans.
The European Commission and Portugal have agreed to inject up to €5 billion to rescue CGD.
The sum will include a €2.7 billion recapitalization provision, selling €1 billion in subordinated debt to private investors and converting €960 million of contingent convertible (CoCo) bonds into equity, Russia Today reported.
Portugal has been discussing the deal with the European Union so the injection would not be considered as state aid and therefore would not become subject to the budget deficit. Portugal has vowed to slash the budget deficit to 2.5 percent of GDP in 2016 from last year's 4.5 percent.
"This is an innovative deal in Europe...This is good news not only for CGD but for the whole Portuguese banking system," Finance Minister Mario Centeno said. The recapitalization will be "in line with market conditions," RT.com further quoted him as saying.
“The Commission’s analysis is that the recapitalization takes place on market terms, since the expected return for the state is sufficiently high and are in line with what a private investor would have accepted,” the bank said in a statement, stressing that the injection won’t count as state aid.
Portugal has already rescued two banks through similar schemes in 2014 and 2015.
Since 2008, Portuguese authorities have injected €10 billion to four other non-state banks. The country’s financial sector has been blamed for poor lending practices and unpaid loans. Portugal also needed a €78 billion bailout in 2011 during the eurozone crisis.