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
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”
Most read in the last 20 days:
- Gold Price Skyrockets in India after Currency Ban – Part III
When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days. Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
- Gold Price Skyrockets in India after Currency Ban – Part IV
A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost. Indian jewelry...
- A Note on Gold and India – What is Driving the Gold Price?
Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption. Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
- Gold Price Skyrockets in India after Currency Ban – Part V
A Brief Recap India's Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes will no longer be legal tender. Linked are Part-I, Part-II, Part-III, and Part-IV, which provide updates on the rapidly encroaching police state Expect a continuation of new social engineering notifications, each sabotaging wealth-creation, confiscating people’s wealth, and tyrannizing those who refuse to be a part of the herd, in the process destroying the very backbone of the...
- Attaining Self-Destruct Velocity
Bad Monday Some Monday mornings are better than others. Others are worse than some. For one Amazon employee, this past Monday morning was particularly bad. No doubt, the poor fellow would have been better off he’d called in sick to work. Such a simple decision would have saved him from extreme agony. But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness. Good-bye cruel world! On this our planet,...
- India's Currency Debacle – An Interview with Jayant Bhandari
A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details). Banned 500 rupee banknotes The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
- Will the Swamp Swallow Trump?
Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle. Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
- All Aboard! Trump’s Express Train to the Future
Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999. Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
- There Are Two Types of Credit — One of Them Leads to Booms and Busts
Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
- Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then. Initially, gold rallied sharply...
- Too Early for “Inflation Bets”?
The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!” The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...
- Putting an End to the Regulatory Industry
Gross Regulatory Overburden Corporate life in America these days is fraught with tedium. First the MBAs imposed their silly six sigma processes and reduced workers to mere widgets. Then the regulators went through and squashed out any fun that remained. Gone are the days when shrewd eccentrics could get rich using techno-babble to hawk the Turbo Encabulator. Alas, there are rules and regulations stymieing all creativity. In fact, as a matter of law, such restrictions are shoved...