Europe calmer but Espirito Santo down again despite reassurances

July 11, 2014, 11:04 AM UTC
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Europe’s financial markets recovered some calm Friday after Portugal’s largest bank, Banco Espirito Santo SA, finally disclosed its exposure to affiliates of its troubled parent company, while the Portuguese central bank declared that BES has enough capital to withstand any losses from that quarter.

The benchmark Lisbon stock-market index recouped around half of Thursday’s losses in early trading and was up 1.8% by 0645 EDT, while the Euro Stoxx 600 was up 0.4%.

The recovery in sovereign bond markets was less pronounced, however, suggesting that investors were still concerned  that governments may have to pump yet more capital into banks in the eurozone’s stressed periphery.

And BES’s own shares continued to fall when they finally resumed trading just after 11.45 local time (0645 EDT), losing 2.2%. They’ve now fallen over 60% in the last three months.

Portugal’s central bank said that “BES holds a sufficient amount to accommodate any negative impact from exposures to the non-financial sector of the Espirito Santo Group (GES), without jeopardising compliance with minimum capital ratios.”

It also stressed that deposits at BES were safe, in an attempt to nip in the bud any sign of depositor panic.

Earlier, BES itself had for the first time put out a clear estimate of  its exposure to affiliates of the Espirito Santo Group, a total of €1.15 billion ($1.56 billion). For comparison, it said its capital level was €2.1 billion above the minimum required by regulators (after a €1.05 billion sale of new shares in May).

In its statement, BES pointed out that some prominent institutional investors were now among its biggest shareholders, including Blackrock, Capital Research, U.K.-based long-only investor Silchester Capital and Swiss-based Baupost. Together, they hold nearly 16% of BES stock.

But the bank’s problems don’t end with its own direct exposure to other parts of GES. It has actively sold debt securities issued by GES companies– whose financial situation isn’t clear–to its own retail and institutional clients. Retail savers hold €853 million of such paper, while institutional clients hold another €2 billion. Any losses on those products could prompt an outcry from investors who feel they were duped.

Speculation about the health of the bank had started after Espirito Santo Financial Group SA, a holding company that owns 25.1% of BES, missed interest payments on its debt, fired some of its management and had trading in its own (Luxembourg-listed) shares suspended.

Analysts Friday said BES’s problems were likely to be contained fairly quickly.

“When there’s talk of financial irregularities (as there has been here for a few weeks) that’s usually something that is idiosyncratic rather than systemic,” said Deutsche Bank strategist Jim Reid.



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