The Short View

July 9, 2014 7:03 pm

Banco Espirito Santo woes fail to fuel crisis fears

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The holy spirit moves in mysterious ways. Or not so mysterious, in the case of Portugal’s Banco Espirito Santo. Its shares fell more than half in four months after audit problems at the founding family investment company, its main shareholder, which on Wednesday delayed payments on short-term debt. Inconveniently, the debt had been sold to some of the bank’s clients.

Crisis memories kicked in for Portuguese bonds, which briefly had their worst day of the year, before recovering to have a merely bad day.

The really interesting thing is what happened to other eurozone banks and peripheral government bonds: nothing. Investors are confident enough that wobbles at a bank need not throw the future of the region back into doubt.

Admittedly, Espirito Santo is small and has not required government money, at least so far. This is not a test on the scale of Dexia’s failure, or the collapse of Ireland’s banking system, but it is reassuring that bank credit default swaps have barely budged.

For eurozone bank shareholders, this may be disappointing. For two years they profited handsomely as fears of system-wide collapses receded. With that trade over, they must rely on the economy (grim), European Central Bank free money (appealing) and capital (hard to judge).

Rather than Espirito Santo, perhaps shareholders should focus on Austria’s Erste Bank. Its shares are down by a fifth after it finally wrote down bad loans in eastern Europe. Other banks have also been cleaning up their balance sheets ahead of the ECB’s asset quality review, due to be completed this autumn.

In the first quarter the prospect of reliable accounts drove shares in peripheral banks up as much as two-thirds. The exuberance has since evaporated as investors worry about nasty surprises on the balance sheet; eurozone bank shares are back down to October levels. The best banks will avoid trouble with the ECB. Can shareholders identify which they are?

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