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:
- Fresh Mainstream Nonsense on Gold Demand
They Will Never Get It... We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our article “Misconceptions About Gold”, or Robert Blumen's excellent essay “Misunderstanding Gold Demand”). Sometimes it is a bit frustrating when we realize it has probably all been for naught. Gold wants to know what it has done now... Photo credit: Ajay Verma / Reuters This was brought home to...
- Switzerland About to Vote on “Free Lunch” for Everyone
Will the Swiss Guarantee CHF 75,000 for Every Family? In early June the Swiss will be called upon to make a historic decision. Switzerland is the first country worldwide to put the idea of an Unconditional Basic Income to a vote and the outcome of this referendum will set a strong precedent and establish a landmark in the evolution of this debate. The Swiss Basic Income Initiative in a demonstration in front of parliament. As we have previously reported (see “Swiss...
- Drowning the Fir
Presidential Duties Our editor recently stumbled upon an image in one of the more obscure corners of the intertubes which we felt we had to share with our readers. It provides us with a nice metaphor for the meaningfulness of government activity. First, here is a look at the picture – just quietly contemplate it for while and let it work its magic on you: Yes, these two gentlemen are actually watering a tree in the middle of a downpour... Photo via...
- Gold – The Commitments of Traders
Commercial and Non-Commercial Market Participants The commitments of traders in gold futures are beginning to look a bit concerning these days – we will explain further below why this is so. Some readers may well be wondering why an explanation is even needed. Isn't it obvious? Superficially, it sure looks that way. As the following chart of the net position of commercial hedgers illustrates, their position is currently at quite an extended...
- Heretical Thoughts and Doing the Unthinkable
Heresy! NORMANDY, France – The Dow rose 222 points on Tuesday – or just over 1%. But we agree with hedge-fund manager Stanley Druckenmiller: This is not a good time to be a U.S. stock market bull. Legendary former hedge fund manager Stanley Druckenmiller at the Ira Sohn conference – not an optimist at present, to put it mildly. Photo credit: David A. Grogan / CNBC Speaking at an investment conference in New York last week, George Soros’ former partner...
- Staying Home on Election Day
Pretenses and Conceits The markets are eerily quiet… like an angry man with something on his mind and a shotgun in his hand. We will leave them to brood… and return to the spectacle of the U.S. presidential primaries. On display are all the pretenses, conceits, and absurdities of modern government. And now, the race narrows to the two most widely distrusted and loathed candidates. US election circus: Deep State Rep vs. Rage Channeller The first, a loose...
- How the Deep State’s Cronies Steal From You
Expanding in Ireland DUNMORE EAST, Ireland – We came down the coast from Dublin to check on our new office building. For this visit, we wanted to stay somewhere different than we normally do. So we chose a small hotel on the coast, called the Strand Inn. Irish landscape with alien landing pads. Even the guys from Rigel II have heard about Ireland's corporate tax rate. Photo credit: Tourism Ireland It is an excellent place for seafood and soda bread on a...
- The World's 100 Most Influential Hacks, Yahoos and Monkey Shiners
Hacks and Has-Beens NORMANDY, France – What has happened to TIME magazine? Henry Luce, who started TIME – the first weekly news magazine in the U.S. – would be appalled to see what it has become. Time cover featuring the sunburned mummy heading the globalist IMF bureaucracy (which inter alia advocates that governments should confiscate a portion of the wealth of their citizens overnight, even while its own employees don't have to pay a single cent in taxes). Once you...
- The Japanese Popsicle Affair
Policy-Induced Contrition in Japan As we keep saying, there really is no point in trying to make people richer by making them poorer – which is what Shinzo Abe and Haruhiko Kuroda have been trying to do for the past several years. Not surprisingly, they have so to speak only succeeded in achieving the second part of the equation: they have certainly managed to impoverish their fellow Japanese citizens. Shinzo Abe and Haruhiko Kuroda, professional yen assassins Photo credit:...
- Kuroda-San in the Mouth of Madness
Deluded Central Planners Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”. BoJ governor Haruhiko Kuroda Photo credit:...
- Revolution at the Ranch
Alarming News BALTIMORE, Maryland – An alarming email came on Tuesday from our ranch in Argentina: “Bad things going on… We thought we had the originarios problem settled. Not at all. They just invaded the ranch.” Originarios on the march... Photo credit: cta.org.ar To bring new readers fully into the picture, Northwest Argentina, where we have our ranch, has a revolution going on. Some of the indigenous people – that is, people with Native...
- The Long-Buried Secret of Napoleon Bonaparte
Family Secrets DUBLIN – The smart money is getting out while the gettin’ is still good. That’s the message we get from reading the recent headlines. Here’s the Financial Times: Redemptions from stock funds have hit nearly $90 billion this year as portfolio managers and hedge funds struggle to navigate a market that no longer seems driven by radical central bank policy. S&P 500 Index: causing navigational problems - click to...