Fears over Portuguese bank Espírito Santo trigger stocks sell-off / FINANCIAL TIMES

Last updated: July 10, 2014 2:57 pm

Fears over Portuguese bank Espírito Santo trigger stocks sell-off

By FT Reporters / http://www.ft.com/intl/cms/s/0/4b0ce5ce-0815-11e4-9afc-00144feab7de.html?siteedition=intl#axzz374Mb9iQp

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

Shares in Banco Espírito Santo plunged more than 17 per cent to their lowest in a year, before Portugal’s stock market regulator, the CMVM, suspended trading at lunchtime pending a statement from the bank.

Portugal’s PSI 20 share index tumbled 4 per cent, hitting a nine-month low, with drops in the share prices of all 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 2.3 per cent and Spain’s Ibex 35 index down 2.5 per cent.

The market turmoil in Europe knocked Wall Street, where the Dow Jones Industrial Average and the S&P 500 both fell 0.9 per cent shortly after the opening bell.

Espírito Santo Financial Group, which owns 25 per cent of Banco Espírito Santo, Portugal’s largest listed bank by assets, said it was suspending its shares from trading due to “ongoing material difficulties at its largest shareholder Espírito 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 Espírito Santo Financière.

A Spanish bank, meanwhile, has aborted a bond sale. Banco Popular Español 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.

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.

The collapse of the Rottapharm IPO follows a poor listing two weeks ago by state owned shipbuilder Fincantieri. The events have raised concerns about funding for Italy’s cash-strapped small and medium sized business.

“Banco Espírito 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 Português fell 6.4 per cent and a clutch of Spanish and Italian banks were down 4 to 5 per cent.

António Roldán, 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 Espírito 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 Espírito 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 15.1 basis points to 3.93 per cent, having earlier hit its highest since mid-May. The yield has climbed 36 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.

“Espírito’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, Greece has decided to cut the size of a sale of three-year bonds to €1.5bn.

The bond sale attracted an order book of just €3bn, despite the relatively generous yield offered.

The final yield was set at 3.5 per cent, at the bottom end of the range guided by banks on the deal, which indicates that despite the somewhat disappointing order book, the demand was solid.

Reporting by Peter Wise in Lisbon, Robin Wigglesworth and Andrew Bolger in London, Tobias Buck in Madrid and Rachel Sanderson in Rome