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Portugal has reached a multi-billion-euro settlement with Santander to end four years of litigation with the Spanish bank over swap contracts that the Lisbon government had challenged as “toxic”.

Under the agreement, public transport companies who contracted the disputed swaps will pay Santander about €1.7bn. In turn, the Spanish group will extend the Portuguese state a €2.3bn loan at “favourable” interest rates, the finance ministry said in a statement.

The litigation dates back to the height of Portugal’s sovereign debt crisis in 2013, when a previous government took legal action to stem huge potential losses from derivatives sold to state-controlled companies.

Most of the swaps were designed to help the firms hedge against potential increases in the Euribor interest rate, but the costs of the contracts rose when the rate fell sharply after September 2008.

Portugal lost a case against Santander in a March 2017 judgement in the High Court in England. In December 2016, the English Court of Appeal also ruled against Lisbon, exposing the transport firms to extensive liabilities.

Under the settlement announced on Wednesday, the four transport firms undertook to pay all they owe on the contracts. The two sides have also agreed to drop all existing and future litigation over the case.

The government said the 15-year loan from Santander would save Portugal €442m in interest payments. Banco Santander Totta, the group’s Portuguese subsidiary, and the transport firms have also agreed to share costs, saving the state companies about €50m, the finance ministry said.

In total, the settlement would reduce costs related to the seven swap contracts 36.8 per cent, the ministry added. The deal would also spare Portugal from reputational damage resulting from “non-compliance with contracts and judgements [against Lisbon] by overseas courts”.

If the previous government had reached an out-of-court settlement with Santander, as it did over other swap contracts, it could have saved state-controlled companies hundreds of million of euros, the ministry added.

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