Portugal bank crisis shakes investor confidence

Fears over the health of Portugal's largest listed bank, Banco Espirito Santo, sent its shares into freefall Thursday, shaking stock markets in Lisbon and across Europe and even the Atlantic. Lisbon stock market regulators suspended trade in Banco Espirito Santo (BES), the country's biggest lender by capitalisation, after its shares had plummeted by 17.24 percent to 0.50 euros. Trading was halted ahead of "important information" to be published by BES, the market regulator said. Concerns about the lender, erupting less than two months after Portugal exited a three-year, 78-billion-euro ($106 billion) international bailout, sent shockwaves through Lisbon and other fragile southern European markets. When stock markets closed, Portugal's PSI index had lost by 4.18 percent, Spain's IBEX-35 index had dropped 1.98 percent, and Italy's FTSE MIB had skidded 1.90 percent. Major markets across Europe also fell back, and stocks opened lower in New York as well. - Solvability concerns - The Portuguese bank has been hit in particular by suspicion that a holding company, Espirito Santo International (ESI), covered up a 1.3 billion euro hole in the accounts. "Investors are concerned about the solvability of BES and the impact it could have on the whole country," said Renaud Murail, manager at France-based stock brokerage Barclays Bourse. BES shares were suspended from trade just hours after its main shareholder Espirito Santo Financial Group voluntarily withdrew its own shares from the market, citing "difficulties" at ESI. Espirito Santo Financial Group said it was "assessing the financial impact of its exposure" to the troubled ESI, which is under investigation by Luxembourg authorities and is reportedly seeking to restructure debts estimated at more than seven billion euros. "No doubt BES is making the main headlines today and is widely blamed for the hefty fall in Portuguese shares and some other periphery countries like Italy and Spain," said analyst Markus Huber at London brokerage Peregrine & Black. "However there is nothing at this stage that would be indicating that the material irregularities which were found at ESI are extending to the entire Portuguese banking system," he added. - Peripheral bank worries - Portugal's central bank, which has ordered an audit of ESI, is believed to have taken discreet action to prevent any problems from damaging the country's banking system during the eurozone's financial crisis. Shares in Espirito Santo Financial Group have halved in value since a June 20 announcement that chief executive Ricardo Salgado will leave his job at the end of the month. Moody's ratings agency has downgraded its outlook on the group's long-term debt to Caa2, its third-lowest rating, due to concerns about ESFG's financial position. Deutsche Bank macro strategist Jim Reid expressed concern that delayed payments on ESI short-term securities were troubling European markets. "Espirito's stresses have brought questions over the underlying health of peripheral banks and the still evolving mechanisms for dealing with struggling institutions back into the spotlight," he said. Spanish lender Banco Popular, whose shares fell 1.95 percent on Thursday, postponed plans for a 750-million-euro contingent convertible bond issue Thursday, a spokesman said, citing "adverse market conditions". Spanish construction group ACS postponed a five-year, 500-million-euro issue, and in Italy, the pharmaceutical company Rottapharm cancelled its share listing, citing "an unfavourable situation" on financial markets. In Greece, the government managed to sell just 1.5 billion euros in three-year bonds at a rate of 3.5 percent on Thursday, about half what it was believed to be targeting. On secondary bond markets meanwhile, the yield on Greece's 10-year debt jumped to 6.298 percent from 6.092 percent at the close on Wednesday. The comparable rate for Spain rose to 2.825 percent from 2.755 percent, while that for Italy ended the day at 2.945 percent, up from 2.881 percent on Wednesday. Portugal's 10-year debt traded at 3.985 percent, up from 3.771 percent. "The problems at BES are affecting Portuguese bonds in particular, but there is also a contagion effect in other southern European countries," commented Patrick Jacq, a trader at BNP Paribas.