Mounting alarm over Espirito Santo roils Portugal’s markets

Portugal’s markets sank and its borrowing costs soared on Thursday as fears grew that financial difficulties at the Espirito Santo group of companies could have far-reaching implications.

Trade in Banco Espirito Santo was halted after a 19 per cent drop after Espirito Santo Financial Group (ESFG) , which owns 25 per cent of BES, decided to suspend trading in its shares and bonds due to "material difficulties" at its own largest shareholder Espirito Santo International (ESI), while it assessed the impact of its exposure to ESI.

Banco Espirito Santo is Portugal’s biggest publicly-traded bank by market value.

Auditors found material irregularities at ESI, a Luxemburg-registered holding company, in May, which BES said represented reputational risks for the bank. BES has sold debt issued by ESI, but ESI has failed to reimburse some of its debt holders on time. As yet it is unclear the full extent to which both BES and ESFG are exposed to any problems at ESI.

With concerns about the country's financial sector pushing Portugal's 10-year bond yields above 4 per cent, the troubles have begun to revive memories of the country's debt crisis, when it was forced to seek a bailout in 2011 from the European Union and IMF.

Portugal exited the bailout last month but still has €6 billion in available funding for the banking sector.

"This Espirito Santo case has been simmering for some time, but is clearly now bursting out into the open and is obviously a troubling development for a country that has just exited its bailout programme," said Nicholas Spiro, head of Spiro Sovereign Strategy in London.

Sources told Reuters on Wednesday the Espirito Santo group is considering debt-for-equity swaps and may ask for more time to repay debts, as it grapples with the financial problems, adding that the restructuring plan is not yet ready.

A slide in BES shares accelerated after ESFG suspended its bonds and shares and they traded 17.24 per cent lower at 0.5090 euros before they were suspended. BES’ shares are now less than half their value of a month ago and well below the 0.65 euro price that investors paid in a capital increase last month.

Lisbon’s benchmark PSI20 stock index slumped 4.2 per cent.

BES would not comment on the slide in its shares. A spokeswoman at the CMVM market regulator said trade in BES was suspended, pending a statement by the bank

The usually little-traded ESFG shares, which have lost 57 per cent of their value in the past month, were down 8.9 per cent before the suspension.

The troubles spread to Spain, where shares in Liberbank , one of the country's smallest lenders, fell 7 percent after it disclosed a 0.93 per cent holding in ESFG.

The troubles for the Espirito Santo family have been exacerbated by lack of information about the family’s holding companies - ESI and Rioforte. The uncertainty centres on exactly how much exposure BES has to the holding companies.

ESFG recently said its exposure to ESI and Rioforte - another family holding company - rose to €2.35 billion at the end of last month from €1.37 billion at the end of 2013.

Luxembourg authorities said last month they had launched an investigation into ESI over alleged breaches of company law.

Reuters