Stock markets on both sides of the Atlantic were rattled on Thursday on fears that the suspension of shares in Portugal's third largest bank could lead to a run on the eurozone's debt-ridden banking sector.
Trading in shares of Banco Espírito Santo was halted on the Lisbon stock exchange after they fell 19% as the bank's credit rating was downgraded.
Banks in Italy, Spain and Portugal saw their shares dive as investors betted they may be hiding bad debts dating back to the 2008 financial crisis.
Lisbon's benchmark PSI 20 stock index slumped 4.2% while the London FTSE 100 was down 45 points at 6672. In New York the Dow Jones closed down 70.54 points to close at 16,915.07.
Peter Garnry, head of equity research at the Danish bank Saxo, said the febrile state of European markets showed that the crisis and its aftershocks were far from over.
"Banco Espírito Santo is the most important event right now impacting European equities," he said. "The event has hit European financials like a torpedo and has revived investors' darkest nightmares about Europe."
Analysts said the problems at Espírito Santo brought to the fore concerns that European banks may be harbouring bigger debts than thought, and that countries outside the Brussels bailout scheme have made themselves ineligible for funds in the event of a sudden credit crunch.
In May Portugal was allowed to leave the debt repayment scheme run by the EU, International Monetary Fund and European Central Bank. Analysts have since voiced fears that the main rescue vehicle – the ECB's OMT fund – is available only to countries being monitored under a bailout programme.
Saxo Bank said: "This highlights one of the shortcomings of the status quo in the European periphery: that Portugal (and other peripheral countries) exiting the programmes at this stage appears rather premature.
"The ECB's OMT is contingent on countries being under a programme. Hence, no programme means no OMT eligibility. If there are any problems with domestic banks it is not entirely clear how they will be resolved.
The IMF said: "The Portuguese banking system has been able to endure the crisis without significant disruption, aided by substantial public capital support and extraordinary measures from the ECB."
However, "pockets of vulnerability remain, warranting corrective measures in some cases and intrusive supervision in others.
The IMF does not comment on individual financial institutions." "It clearly highlights the problems of early bailout exits whilst the economy, the banking system and the public finances are still in a shaky state," it said.
Nicholas Spiro, the head of Spiro Sovereign Strategy in London, said: "This Espírito Santo case has been simmering for some time, but is clearly now bursting out into the open and is obviously a troubling development for a country that has just exited its bailout programme."
Stock markets have declined for the last five days after a series of negative reports from the eurozone, making Espírito Santo's difficulties the latest in a line of destabilising events.
Germany, which has spurred much of the eurozone's growth in the last year, appears to be slowing while France, the second largest eurozone economy, could slip back into recession after a string of weak survey findings.
Espírito Santo's troubles started this week when its largest shareholder, the Espírito Santo Financial Group (ESFG) revealed "material difficulties" at its largest shareholder, Espírito Santo International (ESI). ESFG suspended the bank's shares while it reviewed ESI's problems.
Auditors found material irregularities at ESI, a Luxembourg-registered holding company, in May, which the group board said represented reputational risks for the bank. One of the issues stems from the bank's sale of debt issued by ESI, which ESI has failed to reimburse on time.
As yet it is unclear how exposed the bank and ESFG are to any problems at ESI. The ECB is preparing for a tough assessment of Europe's riskiest banks, and it may be that searching questions from the central bank triggered the crisis.
ESI is a significant corporation in Portugal. It owns 25% of Banco Espírito Santo, the country's third largest bank, and two-thirds of Banco Best, a major fund manager. Group Portugal Telecom, the biggest telecom corporation in Portugal, owns the remaining 34%.
While the exact nature of ESI's problems remains a mystery, the size of the company and the role it plays in Portuguese corporate life left investors panicking about the implications.
After its exit from the bailout scheme Portugal still has €6bn (£4.8bn) in available funding for the banking sector, but the effective interest rate it must pay to borrow jumped above 4% after falling in recent months to near the UK's rate of 2.6%.
If the standard 10-year bond yield rises further, it will be an indication that investors no longer believe the ECB's boss, Mario Draghi, has the power to rescue Portugal and it will need another full-blown international bailout.
Banco Espírito Santo would not comment on the slide in its shares. A spokeswoman at the market regulator CMVM said trade in the shares had been suspended, pending a statement by the bank. The usually little-traded ESFG shares, which have lost 57% of their value in the past month, were down 8.9% before the suspension.
theguardian.com
Trading in shares of Banco Espírito Santo was halted on the Lisbon stock exchange after they fell 19% as the bank's credit rating was downgraded.
Banks in Italy, Spain and Portugal saw their shares dive as investors betted they may be hiding bad debts dating back to the 2008 financial crisis.
Lisbon's benchmark PSI 20 stock index slumped 4.2% while the London FTSE 100 was down 45 points at 6672. In New York the Dow Jones closed down 70.54 points to close at 16,915.07.
Peter Garnry, head of equity research at the Danish bank Saxo, said the febrile state of European markets showed that the crisis and its aftershocks were far from over.
"Banco Espírito Santo is the most important event right now impacting European equities," he said. "The event has hit European financials like a torpedo and has revived investors' darkest nightmares about Europe."
Analysts said the problems at Espírito Santo brought to the fore concerns that European banks may be harbouring bigger debts than thought, and that countries outside the Brussels bailout scheme have made themselves ineligible for funds in the event of a sudden credit crunch.
In May Portugal was allowed to leave the debt repayment scheme run by the EU, International Monetary Fund and European Central Bank. Analysts have since voiced fears that the main rescue vehicle – the ECB's OMT fund – is available only to countries being monitored under a bailout programme.
Saxo Bank said: "This highlights one of the shortcomings of the status quo in the European periphery: that Portugal (and other peripheral countries) exiting the programmes at this stage appears rather premature.
"The ECB's OMT is contingent on countries being under a programme. Hence, no programme means no OMT eligibility. If there are any problems with domestic banks it is not entirely clear how they will be resolved.
The IMF said: "The Portuguese banking system has been able to endure the crisis without significant disruption, aided by substantial public capital support and extraordinary measures from the ECB."
However, "pockets of vulnerability remain, warranting corrective measures in some cases and intrusive supervision in others.
The IMF does not comment on individual financial institutions." "It clearly highlights the problems of early bailout exits whilst the economy, the banking system and the public finances are still in a shaky state," it said.
Nicholas Spiro, the head of Spiro Sovereign Strategy in London, said: "This Espírito Santo case has been simmering for some time, but is clearly now bursting out into the open and is obviously a troubling development for a country that has just exited its bailout programme."
Stock markets have declined for the last five days after a series of negative reports from the eurozone, making Espírito Santo's difficulties the latest in a line of destabilising events.
Germany, which has spurred much of the eurozone's growth in the last year, appears to be slowing while France, the second largest eurozone economy, could slip back into recession after a string of weak survey findings.
Espírito Santo's troubles started this week when its largest shareholder, the Espírito Santo Financial Group (ESFG) revealed "material difficulties" at its largest shareholder, Espírito Santo International (ESI). ESFG suspended the bank's shares while it reviewed ESI's problems.
Auditors found material irregularities at ESI, a Luxembourg-registered holding company, in May, which the group board said represented reputational risks for the bank. One of the issues stems from the bank's sale of debt issued by ESI, which ESI has failed to reimburse on time.
As yet it is unclear how exposed the bank and ESFG are to any problems at ESI. The ECB is preparing for a tough assessment of Europe's riskiest banks, and it may be that searching questions from the central bank triggered the crisis.
ESI is a significant corporation in Portugal. It owns 25% of Banco Espírito Santo, the country's third largest bank, and two-thirds of Banco Best, a major fund manager. Group Portugal Telecom, the biggest telecom corporation in Portugal, owns the remaining 34%.
While the exact nature of ESI's problems remains a mystery, the size of the company and the role it plays in Portuguese corporate life left investors panicking about the implications.
After its exit from the bailout scheme Portugal still has €6bn (£4.8bn) in available funding for the banking sector, but the effective interest rate it must pay to borrow jumped above 4% after falling in recent months to near the UK's rate of 2.6%.
If the standard 10-year bond yield rises further, it will be an indication that investors no longer believe the ECB's boss, Mario Draghi, has the power to rescue Portugal and it will need another full-blown international bailout.
Banco Espírito Santo would not comment on the slide in its shares. A spokeswoman at the market regulator CMVM said trade in the shares had been suspended, pending a statement by the bank. The usually little-traded ESFG shares, which have lost 57% of their value in the past month, were down 8.9% before the suspension.
theguardian.com
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