Espirito Santo problems spook global markets
Wall Street and euro tumble after Portugal's top bank unveils exposure to troubled parent firm
US stocks fell yesterday after the health of Portugal's top listed bank was questioned, bringing back to markets the spectre of a weakened Europe.
Espirito Santo Financial Group, the largest shareholder in Banco Espirito Santo, suspended trading in its shares and bonds, citing "material difficulties" at parent company ESI.
Portugal's markets sank and borrowing costs soared as fears grew that financial difficulties at the Espirito Santo group of companies could have far-reaching implications. Trade in Banco Espirito Santo was halted after a 19 per cent drop.
Auditors found material irregularities at ESI in May, which Banco Espirito Santo said represented reputational risks for the bank. The bank has sold debt issued by ESI, which has failed to reimburse some of its debt holders on time. It is unclear the full extent to which both the bank and the group are exposed to any problems at ESI.
With concerns about the nation's financial sector pushing Portugal's 10-year bond yields above 4 per cent, the troubles have begun to revive memories of its debt crisis, when it was forced to seek a bailout in 2011 from the European Union and International Monetary Fund.
Portugal exited the bailout last month but still has €6 billion (HK$63.3 billion) in available funding for the banking sector.
"This Espirito 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," said Nicholas Spiro, the head of Spiro Sovereign Strategy in London.
The euro snapped a three-day climb against the US dollar as the Espirito Santo scare raised concern the region's economy remains vulnerable to shocks as it emerges from the sovereign-debt crisis.
The Portuguese bank issue "is a sharp reminder that the crisis can come back", said Jane Foley, a senior currency strategist at Rabobank International.
Portugal's benchmark stock index PSI20 fell 3.8 per cent. The Dow was down 0.69 per cent and the S&P 500 was off 0.65 per cent in early trading.
Reuters, Bloomberg
