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.


(emphasis added)

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 Telecom-update

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 Bond Yield(Daily)update

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:


euro-basis swaps

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



Emigrate While You Can... Learn More



Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!


Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


One Response to “Fears Over Banco Espirito Santo Escalate”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 5-cotmmrangegc03Ganging Up on Gold
      So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
  • gold_bullionGold Sector Correction – Where Do Things Stand?
      Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit.   Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India   The commitments of...
  • wryAustralian property bubble on a scale like no other
      Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:   Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:    the record run up in commodity prices and subsequent correction;  the associated...
  • "What if we don't change at all ... and something magical just happens?"Prepare for the Unthinkable
      Red Ink Growth and profits mask a variety of problems.  They hide business inefficiencies and the money suck of corporate adminis-trivia.  They also conceal unproductive staff.   The final career leap   But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams.  During good times it is unclear what these smug fellows do.  During bad times it is lucidly clear that most of them ain’t worth a darn. When the...
  • andy-duncan-and-claudio-grassA Looming Banking Crisis – Is a Perfect Storm About to Hit?
      Andy Duncan Interviews Claudio Grass Andy Duncan of FinLingo.com has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove.   Andy Duncan of FinLingo.com (left) and Claudio Grass of Global Gold (right)   Andy Duncan: How do you see the...
  • spankinggoodtimeUS Stock Market - a Spanking May be on its Way
      Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though.   Time for some old-fashioned...
  • www-usnewsLove him or Hate him: Trump is the Revolution Against the Establishment
      The U.S. Elections: The Latest Crack in the System The 2016 U.S. presidential elections are unprecedented: I don’t believe we have ever witnessed before a campaign year so toxic, so dangerously divisive and full of ad hominem attacks. Both camps have vilified the opposition and their followers, creating a schism in society. There has been no rational dialogue on the issues that truly concern the American public.   The schism Illustration by : M. C....
  • larry-1Meet Your New Stimulus Allocation Czar
      March Towards Midnight The march towards midnight is both stirring and foreboding.  Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom.  Thoughts of imminent mortality haunt each bite.   Tic-toc, tic-toc...   As far as the economy’s concerned, there’s no stopping its march towards midnight.  The witching hour’s rapidly approaching.  We intend to savor each moment and make the best of...
  • state_police_980_600_s_c1_t_c_0_0_1Are the Deep State’s Drones Coming for You?
      What’s Aleppo?   Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan   The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP   DELRAY BEACH, Florida – Biggest foreign policy blunder...
  • speculatorInterview with Doug Casey
      Natalie Vein of BFI speaks with Doug Casey   Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the  parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
  • chairman-tienanmen-square-beijingDonald is Right – The System is Rigged
      Scams and Flimflams BALTIMORE – For weeks, the top news headlines have been about politics. And politics has been all about the Republican Party candidate for president of the United States, Donald Trump.   Two very different elections...   The Establishment, the media, and most right-thinking people look around and sniff the air. Something stinks. And the smell, they say, is coming from that skunk, Trump. Meanwhile, Hillary, all greased up with expensive...
  • where-to-goThe Bamboozled Middle Class
      Gassy and Bloated BALTIMORE – What a great time for an observer with a sense of mischief! This year’s presidential campaign is the most absurd and remarkable we have ever witnessed. After more than two centuries, Americans are finally getting the democracy they deserve – one that is grotesque... slimy... and immensely entertaining, albeit in the mud-wrasslin’ genre.   The mud-wrestlers – well, we did promise you in these pages it would be entertaining like never...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank




Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!