Portugal's government and central bank has assured investors that the country's financial system was sound, aiming to quell worry about the spill over effects of trouble at the Espirito Santo business empire.

"It is important that Portuguese and foreign investors...remain calm about the bank and our financial and banking system," Portuguese Prime Minister Pedro Passos Coelho told reporters.

Recent disclosures of financial irregularities at a web of family-held holding companies behind Portugal's largest listed bank, Banco Espirito Santo, have raised questions about potentially destabilising losses it and other companies in the family's orbit. 

That worry sparked a rout in global markets yesterday, pushing up bond yields and reviving memories of the region's debt crisis: Some European companies even abandoned long-planned fundraising operations.

In a statement late on Thursday night, BES insisted that any losses relating to the bank's €1.15bn exposure to Espirito Santo holdings would not put it at risk. 

The bank said it had €2.1bn in capital above minimum regulatory requirements as of 31 March, taking into account a further €1bn raised via a June share sale.

The statement partially steadied market jitters in Portugal and beyond. 

European markets edged higher and Italy paid record low yields at an auction, shrugging off fears that had weighed on the sovereign debt markets earlier in the week.

However market unease lingered because many questions remain unanswered.

An audit found a "serious financial condition" at Espirito Santo International SA - a vast conglomerate with holdings in banks, hotels and healthcare which is near the top of the family business pyramid. 

ESFG later said ESI had overvalued its assets and failed to recognise losses and debts, but the reasons it got into such a financial mess are unclear. Investors are also in the dark about the size of any potential losses.

And while BES gave the most detailed breakdown yet of its exposure to other Espirito Santo group companies, the bank said it could not assess the potential losses until a restructuring had taken place at its largest shareholder Espirito Santo Financial Group, and at other family holdings under the ESI umbrella.

That restructuring plan is not finished yet, but could be announced as early next week, according to a person with knowledge of the operation. It is likely to include swapping some of the debt issued by ESI and Rio Forte into equity in those companies, as well as pushing out repayment dates on other debt. 

Some non-financial assets, including the Tivoli hotel chain in Portugal and Brazil, could also be sold.

"We welcome the additional visibility provided with yesterday's release on the group's exposures...though there was no clarification on whether there are provisions made on these exposure," BPI analyst Carlos Peixoto said.

Speaking to reporters in the morning, Prime Minister Passos Coelho said investors needed to differentiate between the Espirito Santo family and BES, the lender.

"BES is a separate case from the businesses of the Espirito Santo family...It is important that Portuguese and foreign investors understand that difference," he said.

Banco Espirito Santo has been under scrutiny for weeks after reporting "material irregularities" at Espirito Santo International SA.

The scandal marks a slide in fortune for a bank viewed as one of the most resilient lenders in Portugal and which was founded by the Espirito Santo family in the 19th century. 

BES was the only one of the top listed banks in Portugal not to receive an injection of state capital during the country's sovereign debt crisis.

Phoebus Theologites, chief investment officer at SteppenWolfCapital, said there was little risk of contagion for the rest of the euro zone for now, and Portugal's central bank could engineer a merger if it felt this could help.

"The Portuguese central bank will stabilise the situation and even if the worst should come to pass, a merger will take care of the problem," he said.

"This correction only serves as a reminder that nothing is yet fixed in the euro zone and that, no matter how much money the ECB ends up printing, it will not jump-start the euro zone's economies because the euro zone's troubled banks will need to absorb much of this money for their balance sheets."

"But this does not mean we will get contagion or a crash."

BES raised around €1bn in a rights issue last month. That saw the Espirito Santo family lose control of the bank and prompted its patriarch, Ricardo Espirito Santo Salgado, to step down as the bank's chief.

The family is still the bank's largest shareholder with a 25% stake in the bank held via EFSG, whose interests range from insurance to hotels and property.

Further detail on BES's financial situation will be given on 25 July when the bank releases its half-year results. Shareholders will meet six days later to vote on a new chief executive and new directors, after family members said they would step down from the bank's 25-man board.

"Although we welcome the latest disclosure from BES which goes some-way to enhancing the transparency on its exposure to the wider Espirito group, we still think that the situation facing the bank remains precarious given the opacity around its parent's capital shortfall and the likely restructuring approach," Ciaran Callaghan, a credit analyst at Merrion Stockbrokers, said in a note.

By midday, Portugal's sovereign and corporate debt was making up lost ground, with yields on 10-year sovereign paper down 6 basis points (bps) after losing 20 bps yesterday. Bond yields move in the opposite direction to their price.

BES's junior debt recovered much of yesterday’s losses and its senior unsecured bonds fared even better, trading up 5 basis points after falling 2 bps yesterday.