Banco Espirito Santo Jolts the European Market

The equity markets saw a major sell over the past few days due to major concerns over the financial health of a major Portuguese lender. Banco Espirito Santo SA saw major rating agencies such as S&P and Moody’s sharply downgrading the long term debt rating. The principle reason for the downgrade was due to the massive exposure the bank has to the ultimate parent company Espirito Santo Group.  These concerns saw the Portugal’s benchmark index lead the declines of 4.2% followed by exchanges in Spain, Italy, France and Germany to name a few, giving negative closing for the week. This sparked concerns across the Atlantic Ocean with the Dow Jones Industrial Average giving a 1.1% drop during the day.

Banco Espirito Santo SA

The major problem with the bank is that it is poorly capitalized despite raising additional capital after a bad result in the 2011 stress tests and is expected to do badly in the upcoming stress tests in October 2014. Bailing out its own parent company would be likely to mean bailing in its own creditors but possibly not all of its creditors.

PSI 20

The markets seem to have recovered quite well after the announcement by the Central Bank to bring forward a new CEO and a CFO much earlier than they had previously planned. Moody’s Investors Service said on July 11 that “the problems detected at the parent company of Banco Espirito Santo and their likely impact on the wider banking system should not have a significant impact on the sovereign’s credit metrics and the macroeconomic fundamentals of the country.”

DAX