Mounting alarm over Espirito Santo hits Portugal's financial markets

Thursday 10 July 2014 14.50
Trade in Banco Espirito Santo shares was halted after a 19% drop on the Portuguese market
Trade in Banco Espirito Santo shares was halted after a 19% drop on the Portuguese market

Portugal's markets sank and its borrowing costs soared today as fears grew that financial difficulties at the Espirito Santo group of companies could have far-reaching implications. 

Trade in Banco Espirito Santo shares was halted after a 19% drop on the Portuguese market.

This came after Espirito Santo Financial Group (ESFG), which owns 25% of the bank, decided to suspend trading in its shares and bonds due to "material difficulties" at its own largest shareholder Espirito Santo International (ESI), while it assessed the impact of its exposure to ESI. 

Auditors found material irregularities at ESI, a Luxemburg-registered holding company, in May, which BES said represented reputational risks for the bank. 

BES has sold debt issued by ESI, but ESI has failed to reimburse some of its debt holders on time. As yet it is unclear the full extent to which both BES and ESFG are exposed to any problems at ESI. 

With concerns about the country's financial sector pushing Portugal's 10-year bond yields above 4%, the troubles have begun to revive memories of the country's debt crisis, when it was forced to seek a bailout in 2011 from the European Union and IMF. 

Portugal exited the bailout last month but still has €6 billion in available funding for the banking sector. 

Sources told Reuters that the Espirito Santo group is considering debt-for-equity swaps and may ask for more time to repay debts, as it grapples with the financial problems, adding that the restructuring plan is not yet ready. 

A slide in BES shares accelerated after ESFG suspended its bonds and shares.

BES shares are now less than half their value of a month ago and well below the €0.65 price that investors paid in a capital increase last month. In response, Lisbon's benchmark PSI20 stock index slumped 4.2% today. 

The troubles spread to Spain, where shares in Liberbank, one of the country's smallest lenders, fell 7% after it disclosed a 0.93% holding in ESFG. 

The troubles for the Espirito Santo family have been exacerbated by lack of information about the family's holding companies - ESI and Rioforte. The uncertainty centres on exactly how much exposure BES has to the holding companies. 

Analysts said BES was falling because the probability of a restructuring of debt at holding companies was growing.

ESFG recently said its exposure to ESI and Rioforte - another family holding company - rose to €2.35 billion at the end of last month from €1.37 billion at the end of 2013. 

Luxembourg authorities said last month they had launched an investigation into ESI over alleged breaches of company law.