Edward Evans is a managing editor with Bloomberg Gadfly. He is former managing editor for European finance at Bloomberg News.

Novo Banco's bondholders received a pleasant surprise as European regulators said the bailed-out Portuguese lender had a smaller-than-expected capital hole. The bonds rallied from all-time lows, but people shouldn't be getting too ahead of themselves.

Relief After Stress Test
Price of Novo Banco's 4% notes due Jan. 2019

The lender -- once part of the country's Banco Espirito Santo empire -- will try to plug the shortfall by selling assets and getting a capital injection from an outside buyer. So far it hasn't set out details of what assets would go, while it failed in its first attempt to attract an outside buyer.

The European Central Bank's stress test uncovered a 1.4 billion-euro ($1.5 billion) hole, less than the 2 billion euros feared by analysts. Novo Banco barely squeaked past the 8 percent capital threshold in the regulator's basic test before flunking the more stringent scenario (which assumes GDP shrinking by 2.8 percent) with a 2.43 percent capital ratio.

While that at least removes uncertainty over Novo Banco's capital requirements, its managers still need to explain in detail how they will plug this shortfall, fast. So far, they've said they plan to sell insurance unit GNB Vida, which reports suggest would cut its capital shortfall by 400 million euros, as well as other unspecified "non-core equity" stakes.

Some of the best assets may already have gone. Novo Banco sold its investment banking operation to China's Haitong Securities in December for 379 million euros. Its remaining holdings include a business in France and a minority stake in a lender in Mozambique.

Here's the big problem: Novo Banco has to be wound down by August 2016 unless it finds a buyer, or the EU agrees to extend the deadline. The Bank of Portugal's Resolution Fund owns Novo Banco after providing a 4.9 billion-euro bailout. The fund is blocked from putting more money in, and needs to repay the 3.9 billion-euro loan it took out from the government to fund Novo Banco's rescue -- or the country's other banks will have to pay it back. Hence the pressing need to find a buyer.

The Bank of Portugal put talks to sell Novo Banco on hold in September because the three offers it had were too low.

Since then, Portugal's center-right coalition has been ousted and the socialists are trying to form a government with the support of left-wing parties deeply critical of the way Novo Banco was rescued. It's hard to see a buyer emerging against that kind of political uncertainty.

Similarly, why wouldn't those prospective buyers wait until just before the August 2016 deadline and try to get it at a knock-down price. Even after today's temporary respite, this doesn't look like it will end well.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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