Portugal’s government and central bank assured investors on Friday that the southern European country’s financial system was sound, aiming to quell worry about the spillover effects of trouble at the Espirito Santo business empire.
“It is important that Portuguese and foreign investors... remain calm about the bank and our financial and banking system,” Portuguese Prime Minister Pedro Passos Coelho told reporters in Lisbon.
Recent disclosures of financial irregularities at a web of family-held holding companies behind Portugal’s largest listed bank, Banco Espirito Santo (BES), have raised questions about potentially destabilizing losses at the bank and other companies in the family’s orbit.
In a statement late on Thursday night, BES said that any losses relating to the bank’s 1.15 billion euro (US$1.56 billion) exposure to Espirito Santo holdings would not put it at risk. The bank said it had 2.1 billion euros in capital above minimum regulatory requirements as of March 31, taking into account a further 1 billion raised via a share sale last month.
The statement partially steadied market jitters on Friday in Portugal and beyond. European markets edged higher and Italy paid record low yields at an auction, shrugging off fears that had weighed on the sovereign debt markets earlier in the week.
Portugal’s PSI benchmark closed up 0.6 percent. BES shares opened up 11 percent when trading resumed after a suspension, though the stock then seesawed, closing down 5.5 percent, despite a ban on short selling in the stock.
Portugal’s CMVM market regulator said on Friday it had extended this “shorting” ban on BES shares for two more days.
Moody’s Investors Service said it had cut the long-term debt ratings of BES to “B3” from “Ba3” and the long-term deposit ratings to “B2” from “Ba3,” and it was on review for downgrade.
The ratings agency said the downgrade “reflects Moody’s concerns regarding BES’ creditworthiness that are heightened by the lack of transparency on the ring-fencing of BES against any troubles emerging from its holding company Espirito Santo Financial Group [ESFG] or any other group entity.”
BES’ junior debt recovered much of Thursday’s losses and its senior unsecured bonds fared even better, trading up 5 basis points after falling 2 basis points on Thursday.
Market unease lingers because questions remain unanswered around the bank’s relationship with Espirito Santo companies.
An audit found a “serious financial condition” at Espirito Santo International SA — a vast conglomerate with holdings in banks, hotels and healthcare which is near the top of the family business pyramid. ESFG later said ESI had overvalued its assets and failed to recognize losses and debts, but the reasons it got into such a financial mess are unclear. Investors are also in the dark about the size of any potential losses.
While BES gave the most detailed breakdown yet of its exposure to other Espirito Santo group companies, the bank said it could not assess the potential losses until a restructuring had taken place at its largest shareholder ESFG, and at other family holdings under the ESI umbrella.
That restructuring plan is not finished yet, but could be announced as early as next week, according to a person with knowledge of the operation. It is likely to include swapping some of the debt issued by ESI and Rio Forte into equity in those companies, as well as pushing out repayment dates on other debt. Some non-financial assets, including the Tivoli hotel chain in Portugal and Brazil, could also be sold.