They Haven't Been Praying Enough
According to press reports, Espirito Santo Financial Group, one of Portugal's largest financial groups and the biggest shareholder in Banco Espirito Santo (i.e., the Holy Spirit Bank, BES), is about to miss interest payments on some of its short term notes. The event prompted a sell-off in Portuguese government bonds as well. 10 year government bond yields have declined from more than 16% at the height of the sovereign debt crisis to about 3.25% at their recent lows, but have shot up by more than 60 basis points in recent weeks.
The chart of BES suggests that the troubles at the Holy Spirit Bank must have been on the minds of market participants for a while already. We have a feeling a costly scandal is brewing.
For BES shareholders it's presumably a bit like involuntarily taking a vow of poverty. Incidentally, the recent revelations about BES also led to shares of Portugal Telecom being taken out behind the shed and shot. Here are some additional details on the affair:
“Portuguese stocks and bonds dropped Wednesday, as continuing concerns over the financial health of lender Banco Espírito Santo rattled investors.
Shares in Banco Espírito Santo led declines after media reports that Espírito Santo International, which owns part of Espírito Santo Financial Group, which in turn owns a large stake in BES, had delayed coupon payments on some of its short-term debt.
"Last week some clients were asked to swap the commercial paper into equity," RBS credit strategist Alberto Gallo wrote in a note. He added that BES isn't directly responsible for the repayment of any ESI bonds, but "is subjected to reputational risks given its connection to the family."
Banco Espírito Santo didn't reply to a request for comment.
Moody's Investors Service on Wednesday downgraded its rating on Espírito Santo Financial Group to Caa2 from B2. "Moody's concerns regarding ESFG's creditworthiness are heightened by the lack of transparency around both the Espírito Santo Group's financial position and the extent of intra-group linkages," the ratings firm said.
Portugal Telecom shares dropped as much as 9% in response to criticism from Brazil's state development bank BNDES relating to an investment by the telecommunications company in debt issued by Espírito Santo International.
The impact was also felt in sovereign debt markets, with 10-year Portuguese government bond yields climbing to 3.82%, their highest in more than six weeks, before dropping back slightly. Yields rise as prices fall.
Traders said the uncertainty surrounding BES and declines in Portuguese stocks had caught investors off guard, given many had been betting on further gains for government debt at the start of the third quarter.
This is certainly not the first time that investors have been “caught off guard” by something like this, but “betting on further gains” in government debt may have been a foolish thing to do in any event. Portuguese bond yields have already declined enormously in an extremely short time period. Buying them at recent levels was asking for trouble.
Meanwhile, Banco Espirito Santo managers didn't have time to comment because they were actively seeking forgiveness for their financial sins. We have come across a photograph showing a procession of them. It is possible that the board of Portugal Telecom is also in the picture:
Managers of Espirito Santo Financial Group and Portugal Telecom are currently busy repenting.
(Photo credit: REUTERS / Erik De Castro)
The lack of transparency of the Santo Espirito group bemoaned by Moody's is evidently causing quite a bit of collateral damage. With the dealings of the ES group shrouded in a cloud of frankincense, investors can only guess how big the problem really is. We would however say that a group that cannot pay interest on its short term debt must really be in big trouble, considering that every corporate or sovereign Tom, Dick and Harry asking for debt financing happily unburdened by covenants or issuing bonds in junk-bond land gets funding these days at the drop of a hat.
The exposure of Portugal Telecom seems to be viewed as a serious problem by market participants as well, as the chart of its shares rather strongly suggests:
Shares of Portugal Tele-Splat in all their recent terribly glory – click to enlarge.
We recently noted that France's CAC-40 index looks like it may be leading a downside break in European stocks, but Portugal's PSI-20 index has lately also suffered noticeably from the burgeoning trouble at BES.
After bidding adios to its uptrend line some time ago already, the index has just violated an important lateral support level as well. In the course of this it has become a tad oversold and may therefore soon bounce, but the fact remains that the chart no longer looks very convincing.
As noted above, the government's debt securities have also come in for a spot of mauling, even though it is actually still a fairly small bounce in yields considering where Portuguese bond yields have been over the past few years. However, the fact that the recent bout of selling in the bond market has coincided with the market realizing that BES has a problem suggests that there is a degree of worry that the government may end up extending support to the troubled lender.
Lisbon's PSI-20 index: both trend line and lateral support (blue line) are gone – click to enlarge.
Portugal's 10 year government bond yield, daily. It has been rising since worries about BES have begun to percolate – click to enlarge.
Portugal is of course a small country, and the world will no doubt keep turning if in the worst case one of its bigger banks should so to speak cross the pearly gates and move on to the afterlife. We nevertheless find the event noteworthy, because we are on alert for debt-related troubles at the moment. To this it must be kept in mind that credit market problems almost always start in some obscure corner of the markets. What initially looks like a seemingly unimportant event may in retrospect be recognized as one of the first steps in a whole chain of events that are far greater significance. A fairly recent classical example was the bankruptcy of two small US sub-prime lenders in February of 2007, which was barely noticed. It is of course not possible to tell with certainty whether the recent problems in Portugal will turn out to have been one of those warning shots or not. But given the recent huge boom in debt securities, the system is no doubt vulnerable.
Lettuce pray for Holy Ghost Bank, its creditors and shareholders, as well as Portugal's tax cows, amen.
(Photo credit: klosterkirche.de)
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Big Portuguese Bank Gets Into Trouble”
Most read in the last 20 days:
- How the Welfare State Dies
Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico). Gee, we wonder why? They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
- Free Speech Under Attack
Offending People Left and Right Bill Bonner, whose Diaries we republish here, is well-known for being an equal opportunity offender - meaning that political affiliation, gender, age, or any other defining characteristics won't save worthy targets from getting offended. As far as we are concerned, we generally try not to be unnecessarily rude to people, but occasionally giving offense is not exactly beneath us either. The motto of the equal opportunity...
- Toward Freedom: Will The UK Write History?
Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call. The battle lines are...
- A Market Ready to Blow and the Flag of the Conquerors
Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast. St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6 Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
- Going... Going... Gone! The EU Begins to Splinter
Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
- Rule Britannia
A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union. Waving good-bye to...
- What Could Possibly Go Wrong?
A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China. This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong. Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool I took the hydrofoil to Macau one afternoon and the same service back early the next morning. On the morning trip, I am sure that I saw many of the...
- The Problem with Corporate Debt
Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour. Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us: “Businesses racked up debt in the...
- A Darwin Award for Capital Allocation
Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy. The inputs are too vast. The relationships are too erratic. The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne Quite frankly, keeping tabs on it all is beyond human capacity. This also goes for the federal government. Even with all their data gatherers and...
- Janet Yellen’s $200-Trillion Debt Problem
Blame “Brexit” BALTIMORE – The U.S. stock market broke its losing streak on Thursday [and even more so on Monday, ed.]. After five straight losing sessions, the Dow eked out a 92-point gain. The financial media didn’t know what to say about it. So, we ended up with the typical inanities, myths, and claptrap. “Investors” are pushing the DJIA back up again..apparently any excuse will do at the moment. The idea may backfire though, as exactly the same thing happened...
- Gold and Brexit
Going Up for the Wrong Reason Gold is soaring. It should—and a lot—but in my view not for the reason it is. Indeed gold is insurance for uncertain times, a time that Brexit seems to represent. But insurance is an administrative cost — one must minimize its use. August gold contract, daily – gold has been strong of late, but this seems to be driven by “Brexit” fears - click to enlarge. Moreover, insuring against Brexit might ironically be equivalent...
- The Fed’s Doomsday Device
Bezzle BALTIMORE – Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh? Only two? There were four last time! Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower. But Brexit is a side show. As our contacts in London...