Big Portuguese Bank Gets Into Trouble

They Haven’t Been Praying Enough

According to press reports, Espirito Santo Financial Group, one of Portugal’s largest financial groups and the biggest shareholder in Banco Espirito Santo (i.e., the Holy Spirit Bank, BES), is about to miss interest payments on some of its short term notes. The event prompted a sell-off in Portuguese government bonds as well. 10 year government bond yields have declined from more than 16% at the height of the sovereign debt crisis to about 3.25% at their recent lows, but have shot up by more than 60 basis points in recent weeks.

The chart of BES suggests that the troubles at the Holy Spirit Bank must have been on the minds of market participants for a while already. We have a feeling a costly scandal is brewing.

The Holy Spirit Bank inflicts some very unchristian pain on its shareholders – click to enlarge.

For BES shareholders it’s presumably a bit like involuntarily taking a vow of poverty. Incidentally, the recent revelations about BES also led to shares of Portugal Telecom being taken out behind the shed and shot. Here are some additional details on the affair:

“Portuguese stocks and bonds dropped Wednesday, as continuing concerns over the financial health of lender Banco Espírito Santo rattled investors.

[…]

Shares in Banco Espírito Santo led declines after media reports that Espírito Santo International, which owns part of Espírito Santo Financial Group, which in turn owns a large stake in BES, had delayed coupon payments on some of its short-term debt.

“Last week some clients were asked to swap the commercial paper into equity,” RBS credit strategist Alberto Gallo wrote in a note. He added that BES isn’t directly responsible for the repayment of any ESI bonds, but “is subjected to reputational risks given its connection to the family.”

Banco Espírito Santo didn’t reply to a request for comment.

Moody’s Investors Service on Wednesday downgraded its rating on Espírito Santo Financial Group to Caa2 from B2. “Moody’s concerns regarding ESFG’s creditworthiness are heightened by the lack of transparency around both the Espírito Santo Group’s financial position and the extent of intra-group linkages,” the ratings firm said.

Portugal Telecom shares dropped as much as 9% in response to criticism from Brazil’s state development bank BNDES relating to an investment by the telecommunications company in debt issued by Espírito Santo International.

The impact was also felt in sovereign debt markets, with 10-year Portuguese government bond yields climbing to 3.82%, their highest in more than six weeks, before dropping back slightly. Yields rise as prices fall.

Traders said the uncertainty surrounding BES and declines in Portuguese stocks had caught investors off guard, given many had been betting on further gains for government debt at the start of the third quarter.