Is Portugal A New Financial Crisis? Explained Via European Perspective

Is Portugal A New Financial Crisis?  Explained Via European Perspective 
Portugal bank fears trigger Europe sell-off

[BigTrends.com note:  The following article from ft.com is a good summary of the various events going in in Portugal and why/how they are affecting Europe and other markets.  At this point to us, it appears uncertain as to whether this is a single company event where there has been some over-reaction, a single country event that will pass quickly, or something that may further spread to bonds and markets in other countries in Europe and around the globe.]

by Peter Wise, Robin Wigglesworth, Andrew Bolger, Tobias Buck and Rachel Sanderson for FT.com

Fears over the health of one of Portugal's biggest banks triggered a sell-off in Europe's stock markets on Thursday and sent Lisbon's borrowing costs sharply higher, with the turmoil threatening to hit company flotations and bond sales.

Portugal's PSI 20 share index tumbled 4.6 per cent to a 9-month low, with drops in the share prices of 19 of the 20 companies that make up the index.

There were sharp falls in equity markets across the so-called "periphery" of Europe, with Italy's FTSE MIB index down 2.5 per cent and Spain's Ibex 35 index down 2.6 per cent.

Espirito Santo Financial Group, which owns 25 per cent of Banco Espirito Santo, Portugal's largest listed bank by assets, said it was suspending its shares from trading due to "on-going material difficulties at its largest shareholder Espirito Santo International", the Luxembourg-based parent company for the family group's holding, and because of "ESFG's exposure to that company".

ESFG said it was also suspending its listed bonds, including the bond issued by its fully owned subsidiary Espi?rito Santo Financie`re.

Though trading in ESFG shares and bonds was suspended, shares in Banco Espirito Santo plunged another 14.6 per cent to its lowest in a year.

A Spanish bank, meanwhile, has aborted a bond sale. Banco Popular Espanol had planned to issue a "contingent convertible" bond, or coco, to raise at least 500m, but the turbulent financial markets led to the Spanish lender shelving the deal.

A spokesman for Banco Popular said the coco had been postponed "due to market conditions".

Trading was halted in several Italian banks. At the same time, Italy's Rottapharm, a pharmaceuticals group, pulled its initial public offering after failing to achieve the price it wanted for its shares from investors.

"Banco Espirito Santo is the most important event right now impacting European equities. Investors are dumping the shares and bonds of the Portuguese lender," said Peter Garnry, head of equity strategy at Saxo Bank.

"The event has hit European financials like a torpedo and has revived investors darkest nightmares about Europe."

Shares in Banco Comercial Portuguese fell 6 per cent and a clutch of Spanish and Italian banks were down 4 to 5 per cent.

Antonio Roldan, an analyst with the Eurasia Group, said the sell-off appeared to be triggered by uncertainties over the extent of BES's exposure to the financial problems besetting the Espirito Santo family group.

But he said BES appeared to be in a "relatively healthy position" and was adequately "buffered and protected" from the difficulties affecting the non-financial assets of the Espirito Santo group.

Portugal's bond market suffered another bruising day, with government debt prices continuing to fall.

The benchmark 10-year bond yield, which moves inversely to the bond price, climbed another 20 basis points to 3.98 per cent, the highest since mid-May. The yield has climbed 41 bps so far this week.

Analysts have voiced hopes that the problems will be contained eventually, with some arguing that the sell-off is a buying opportunity. But Jim Reid of Deutsche Bank pointed out the wider implications.

"Espirito's stresses have brought questions over the underlying health of peripheral banks and the still evolving mechanisms for dealing with struggling institutions back into the spotlight," he said.

Meanwhile, in Greece, a sale of three-year bonds that is to be finalised today attracted a provisional order book of 2.6bn, a somewhat underwhelming response so far despite the relatively generous yield offered.

Greece is targeting a "benchmark" sized bond - larger than 500m - but local press have reported that officials were hoping for up to 3bn, in which case the order book would have to grow quite significantly.

Appetite for periphery bonds has soured somewhat, pushing Greece to indicate that the three-year bonds would yield between 3.5 per cent and 3.625 per cent yesterday.

Bankers will be hoping that the order book grows rapidly this morning, to allow them to issue a decent size and at a lower yield.

Courtesy of ft.com