Portugal tries to reassure bank customers

Portugal's prime minister Pedro Passos Coelho yesterday sought to calm customers of Banco Espírito Santo (BES) as the lender's potential exposure to the troubled Espírito Santo group shook the markets less than two months after the country ended its bailout programme.

“Those with deposits have reason to have every confidence in the security that Banco Espírito Santo offers their savings,” Mr Passos Coelho told journalists in Lisbon.

Espírito Santo Financial Group (ESFG), which owns a quarter of BES, suspended trading in the bank's shares on Thursday after they dropped more than 17 per cent. The turbulence was also felt in neighbouring Spain, where the Ibex 35 slipped 2.0 per cent.

Irregularities

At the heart of the affair is holding company

Espírito Santo International

(ESI), ESFG’s largest shareholder. Auditors detected irregularities at the Luxembourg-based company in May and it missed a debt payment this week.

Lack of information about the extent of BES's exposure to ESI and another holding firm, Rioforte, have fuelled the concerns about the lender.

The prime minister insisted that the problems of ESI should not be directly linked to BES, which is Portugal’s biggest publicly-traded bank according to market value.

“One thing is the business dealings of the Espírito Santo family and another are those of the bank,” Mr Passos Coelho said. “It’s very important that Portuguese financial agents and foreign investors not only manage to understand this difference, but that they are calm when it comes to the bank’s situation.”

However, the prime minister did call on BES to negotiate with its creditors in order to minimise any possible debt repayment problems.

BES has said it will replace its chief executive, Ricardo Salgado, and its chief financial officer, Amílcar Morais Pires, by the end of the month, in a move approved by the Bank of Portugal.

Yesterday, the Portuguese stock market commission lifted the suspension of trading in the bank’s shares, apparently convinced by a statement BES had presented at midnight on Thursday. In the communiqué, BES reported having capital of €2.1 billion as of June and that its exposure to the other companies in the group totalled €1.2 billion.

Heavy losses

However, yesterday, BES was among several companies on the Lisbon stock market to suffer heavy losses, slipping a further 5.3 per cent. BES’s shares are worth less than half their value of a month ago.

As well as unsettling the stock market, the uncertainty surrounding the Espírito Santo group has pushed Portugal's 10-year bond yields over 4 per cent this week, in an unwelcome reminder of the height of the euro zone crisis. In 2011, after its borrowing costs had become unsustainable, Portugal followed Greece and Ireland in requesting a sovereign bailout. The €78 billion package was accompanied by strict financial supervision on the part of European authorities and the IMF and severe austerity measures.

In May, the country exited the rescue programme, having, it was hoped, resolved its financial weaknesses.

On Thursday, a brief statement issued by the IMF on Portugal’s financial system suggested there are still issues to straighten out, although it did not reference BES. “Pockets of vulnerability remain, warranting corrective measures in some cases and intrusive supervision in others,” it said.