Portuguese Banking Group's Woes Deepen
When we wrote about the troubles at Banco Espirito Santo yesterday (our post was written before European markets opened) information was still fairly scant. However, on the very same day the situation continued to escalate. Here is an excerpt from the WSJ providing further details:
Shares in the troubled Portuguese lender have been under pressure since May, when the bank disclosed that an audit ordered by Bank of Portugal into Espírito Santo International SA, the conglomerate that indirectly holds a stake in the bank, had found Espírito Santo International was in a "serious financial condition" and had uncovered accounting irregularities. But the declines mounted drastically Thursday after investors learned Espírito Santo International had delayed coupon payments relating to some short-term debt securities.
Switzerland-based Banque Privee Espírito Santo SA, which is owned by Espírito Santo Financial Group, said in an emailed statement Wednesday that Espírito Santo International has delayed the repayment of short-term debt sold to some of its clients. It said the repayment is the sole responsibility of the conglomerate. The conglomerate declined to offer a separate comment.
The bank's stock dropped more than 17% before trading in its shares was suspended. Trading in Banco Espirito Santo's controlling shareholder, Espirito Santo Financial Group SA, listed in Luxembourg and Lisbon, was also suspended earlier Thursday. The Portuguese markets regulator banned short selling, or betting against, Banco Espirito Santo shares in Friday's session.
Apparently, short selling in European bank stocks is only allowed as long as they are going up. A short selling ban never helps a stock to recover or keeps it from falling. On the contrary, it is like a red flag – it's the regulator saying “we believe only coercion can help at this point”. This is of course utter self-defeating nonsense. Here is where Banco Espirito Santo landed before trading in the stock was halted:
BES crashes another 17% before being halted – click to enlarge.
Here is more color from the WSJ – what's really amazing about all this is that the shady financing structure of the Espirito Santo group has apparently been criticized “for years”. How then can any of this have been a surprise to anyone?
It actually goes to show that the idiot population in financial markets continues to be quite large. Normally events like the 2008 crisis and the subsequent euro area debt crisis would have whittled it down significantly. Evidently that doesn't happen when all and sundry get bailed out and central banks print trillions in new money in no time at all. The fact that the stock of BES only started to fall such a short time ago (and rallied strongly previously) shows us how market participants have been lulled into a false sense of confidence by interventionist distortions.
It has been more than a year since fears about the health of a European bank rattled markets, and investors, bankers and regulators have been growing increasingly confident about the continent's financial system.
“Critics of Espírito Santo International's complex corporate structure have worried for years about the links among companies within the conglomerate. Among the concerns: whether the group's nonfinancial companies—including a hotel chain and a real-estate company—were using the bank and its customers to raise funds. Those concerns were heightened by the fact Ricardo Salgado, the chief executive of Banco Espírito Santo and a member of the influential Espírito Santo family, was also sitting on the board of Espírito Santo International. He quit the board earlier this year and is expected to resign as CEO of the bank later this month after the installation of a new management team led by outsiders, as requested by the Bank of Portugal.
Espírito Santo International had been relying heavily on selling debt to the funds marketed by its own banks, according to financial documents reviewed by the Journal last year. Over a 21-month period, it cumulatively sold more than €6 billion ($8.2 billion) in short-term debt to one of its own investment funds.
Espírito Santo International said in December it would replace the financing coming from the funds, mainly through the issuance of commercial debt. That debt was sold to private-banking customers and Portugal Telecom SGPS SA, among others. Portugal Telecom disclosed last month that it had €897 million of debt from a unit of Espírito Santo International. Banco Espírito Santo is a large Portugal Telecom shareholder.
The amount of Espírito Santo International's outstanding debt is unknown, because the company is privately owned. Banco Espírito Santo said late Thursday that exposure to Espírito Santo International entities, including Espírito Santo Financial Group, totaled €1.2 billion as of June 30, mostly in loans. Its retail clients held €853 million in debt from the entities, while institutional clients held €2 billion.
The amounts involved are of course quite small by international standards. Let us not forget that 10s of trillions in additional debt ($30 trillion in the form of debt securities alone) have been added atop the global debt pile since 2008. The problem is mainly that Espirito Santo serves as a reminder of the inherent instability of the modern monetary system. The fear is that this is tip of the iceberg stuff, which it actually is.
Related Chart Updates
Collateral damage victim Portugal Telecom also continued to get mauled on the Lisbon Stock Exchange. The stock has been in free-fall for the past two weeks:
Portugal Tele-Splat's stock continued to get creamed – click to enlarge.
Yesterday we showed the (then still small) lateral support break the PSI 20 index in Lisbon had achieved on Wednesday. It seems it was the real McCoy:
That sure looks like a vigorous third wave down by now. – click to enlarge.
Portugal's 10 year yield shot back above the 4% level on Thursday, in its biggest one day rise since the recent short term uptrend began:
Portugal, 10 year government bond yield – back above 4% – click to enlarge.
However, CDS on the sovereign debt of the “PIGS” quartet haven't really budged much, which is an indication that the worries remain localized for the moment. It is possible that the move in Portuguese bond yields is simply due to profit taking, with recent events providing the excuse.
5 yr. CDS spreads on the sovereign debt of Portugal (orange), Italy (yellow), Spain (cyan) and Greece (green) – note that the data series are differently scaled on this chart (color-coded) – Greek and Portuguese CDS spreads are not actually lower that those of Italy and Spain (the current levels are high-lighted) – click to enlarge.
Lastly, for the first time in a long time, euro basis swaps have moved a bit into negative territory again recently, after briefly hugging the zero line at the height of the recovery. It's not a big move and may not mean much, but it is definitely different from what went on before:
Three month, one year, three year and five year euro basis swaps – click to enlarge.
Readers who have missed it and want some background information can download a primer on basis swaps here.
As far as canaries in the coal mine go, this is a very small one. However, as noted previously, problems in credit markets always begin with relatively small overextended players getting into trouble.
Charts by: 4-traders.com, investing.com, bigcharts, Bloomberg
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “Fears Over Banco Espirito Santo Escalate”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...