After the financial turmoil of 2008 and 2009 investors seem to have a short memory when it comes to the financial institutions in the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries. Government bond yields soared in those years as it appeared all were teetering on the brink of collapse with their banks saddled with billions of euros of dodgy loans and in many cases solvency was an ongoing concern as commercial property assets in particular collapsed in value. The European Central bank, European Financial Stability Facility Fund and International Monetary Fund came to the rescue of course with huge bail out loans for the likes of Greece and Ireland. In the case of Ireland this amounted to €85 billion and for Greece a staggering €300 billion. Since those dark days the assumption has been that all the troubles of the European banking sector have been solved.
Today the calm has been broken. The markets fell heavily today as one of Portugal’s biggest banks came a cropper with shares in Banco Espírito Santo (BES) dropping heavily before being suspended this morning pending a statement from the bank. Shares in Portugal, Italy and Spain fell heavily whilst the Dow Jones Industrials dropped over 170 points at one point.
Investors are selling the shares and bonds of BES on the news that its parent company Espirito Santo Financial Group SA has missed a crucial debt payment. Banco Espírito Santo had seemed relatively resilient to the financial crisis of prior years being the only top Portuguese bank not to receive an injection of state capital during the country’s international bailout. It raised over €1 billion in a rights issue in June, lifting its common equity tier one capital ratio under Basel III rules from 8% to just under 10%.
Deutsche Bank wrote “Espirito’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”.
A glitch or a house of cards? The European Central Bank will I’m sure be keeping a close eye on things to prevent any hint of contagion but there are already some knock on consequences with a Greek government bond sale scaled back. The news from the Federal Reserve FOMC minutes yesterday that the asset purchase programme was likely to end in October also helped unsettle investors. Finally, French manufacturing dropped 2.3% in May, while output dropped 1.7%, much worse than expected and Italian industrial output declined 1.2%, the largest drop since November 2012. The ongoing news from the US earnings season should dictate sentiment in the next few weeks but this news from Portugal may be making some fund managers feel like pressing the sell button and taking some of those big profits.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.
by contrarianuk
At last a decent excuse for a selloff in the markets as Portuguese banking problems emerge
Jul 10, 2014 at 2:27 pm in Market Commentary by contrarianuk
After the financial turmoil of 2008 and 2009 investors seem to have a short memory when it comes to the financial institutions in the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries. Government bond yields soared in those years as it appeared all were teetering on the brink of collapse with their banks saddled with billions of euros of dodgy loans and in many cases solvency was an ongoing concern as commercial property assets in particular collapsed in value. The European Central bank, European Financial Stability Facility Fund and International Monetary Fund came to the rescue of course with huge bail out loans for the likes of Greece and Ireland. In the case of Ireland this amounted to €85 billion and for Greece a staggering €300 billion. Since those dark days the assumption has been that all the troubles of the European banking sector have been solved.
Today the calm has been broken. The markets fell heavily today as one of Portugal’s biggest banks came a cropper with shares in Banco Espírito Santo (BES) dropping heavily before being suspended this morning pending a statement from the bank. Shares in Portugal, Italy and Spain fell heavily whilst the Dow Jones Industrials dropped over 170 points at one point.
Investors are selling the shares and bonds of BES on the news that its parent company Espirito Santo Financial Group SA has missed a crucial debt payment. Banco Espírito Santo had seemed relatively resilient to the financial crisis of prior years being the only top Portuguese bank not to receive an injection of state capital during the country’s international bailout. It raised over €1 billion in a rights issue in June, lifting its common equity tier one capital ratio under Basel III rules from 8% to just under 10%.
Deutsche Bank wrote “Espirito’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”.
A glitch or a house of cards? The European Central Bank will I’m sure be keeping a close eye on things to prevent any hint of contagion but there are already some knock on consequences with a Greek government bond sale scaled back. The news from the Federal Reserve FOMC minutes yesterday that the asset purchase programme was likely to end in October also helped unsettle investors. Finally, French manufacturing dropped 2.3% in May, while output dropped 1.7%, much worse than expected and Italian industrial output declined 1.2%, the largest drop since November 2012. The ongoing news from the US earnings season should dictate sentiment in the next few weeks but this news from Portugal may be making some fund managers feel like pressing the sell button and taking some of those big profits.
Contrarian Investor UK
IMPORTANT: The posts I make are in no way meant as investment suggestions or recommendations to any visitors to the site. They are simply my views, personal reflections and analysis on the markets. Anyone who wishes to spread bet or buy stocks should rely on their own due diligence and common sense before placing any spread trade.