On Monday we pointed to emerging market concerns about banking problems in Portugal, as well as separate worries in Eastern Europe, which had hurt one of Austria’s largest banks.
Overnight Thursday, those problems in Portugal overtook the concerns about the health of banks in Bulgaria, Hungary and Austria to rattle global markets, sending the US dollar higher, as well as gold, and the Australian dollar, interestingly.
The problems in Portugal have been rattling around European markets for a week or more and came to a head yesterday when the complicated ownership structure of the bank involved, Banco Espírito Santo (BES), Portugal’s largest listed bank by assets, caught up with it and triggered fears of collapse.
Portugal’s market regulator said it would ban short-selling in BES stock on Friday after trading resumes. That will be the second bank on shorting the bank’s shares in a week – the fears won’t go away. There are fears short selling could drive the bank’s shares to the point where they drag the market sharply lower.
For investors in faraway Australia, the problems in Portugal seem distant and unconcerning, which they are up to the point where they could trigger a slide in bank shares through Europe, and the US.
The question is ‘how come an obscure bank in a small broke country in Europe can trigger concerns and rattle markets globally?"
The answer is the interconnectedness of all financial markets and the fact that investor fears (even in these days of low volatility) about the strength of European banks and the region’s financial system, haven’t gone away, despite the apparent recovery.
Markets in the US, Australia and elsewhere will be impacted, to varying to degrees by these fears. Everything could settle down later today with some reassuring news, such as a big funding deal to help the bank’s family owners who seem to be at the root of the concern.
And then next week, new concerns erupt – investor confidence is more strained than we think.
At the moment the problems are confined to sharemarkets and not banks and their funding links.
The fears stem from the very familiar complicated ownership structure of BES which have enabled one of Portugal’s wealthiest families to control the bank via a company based in the tax-haven of Luxembourg.
After days of rumours and a bank on short selling the bank’s shares late last week, Portugal’s stock market regulator halted trading in Banco Espirito Santo after the shares fell 19% on Thursday night, our time.
The sell-off followed a decision by Luxembourg – based Espirito Santo Financial Group (ESFG), which owns 25% of the Portuguese bank, to suspend trading in its shares and bonds due to "material difficulties" at its own largest shareholder, Espirito Santo International (ESI), which is controlled by one of Portugal’s most important business clans, the Espirito Santos.
ESFG is a conglomerate that also owns an insurance company and a Swiss bank. It said it was halting trading while it assessed the impact of its exposure to ESI.
The big question is whether ESI and the Espirito Santos family have the resources to stop the growing concerns by finding the funding to convince investors it isn’t going broke.
Reuters says the Portugeuse government is holding some six billion euros in bank aid money from its bailout which could be used to help the bank. but seeing the problem is upstream in the ownership structure in Luxembourg. That’s where the funding certainty has to be provided, according to media reports.
To many investors, hardened by years of exposure to similar leveraged structures, that’s a big concern. There’s doubt the family could fail to stump up the money to help relieve pressure on BES, without selling assets of their own.
The concerns in Portugal have helped undermine the recent rebound in European sharemarkets.
The market indicator, the Stoxx Europe 600 index fell 1.1% overnight Thursday, to close at 336.37, its fifth straight day in the red and the lowest closing level for two months.
Lisbon’s exchange fell 4.2% overnight, after a 2% drop on Wednesday, leaving it at its lowest level since October.
Trading in several Italian banks was also halted as the Milan market fell 3% at one stage before ending the day down nearly 2%.
Yields on Spanish, Portuguese and Italian government debt rose sharply – yields on German debt fell as the flight to quality by some investors stepped up pace.
The Aussie dollar in fact rose as well against the greenback, adding nearly half a US cent in a ‘slight to quality’ by investors in the wake of the Portuguese banking problems.
It traded around 93.93 just after 7 am, after losing half a cent yesterday after the June jobs report was released.
Wall Street fell, but its losses for the day were half those reached in earlier trading.
Our market will start around 15 to 20 points lower on the ASX 200, according to the overnight futures market.
