From:
http://www.ft.com/cms/s/0/4b0ce5ce-0815-11e4-9afc-00144feab7de.html#ixzz375z8JYWw
Fears over Banco Espírito Santo trigger stocks sell-off
By Ralph Atkins and Martin Arnold in London and Peter Wise in Lisbon
Fears about one of Portugal’s biggest banks led to a sharp sell off across European financial markets on Thursday, forcing bankers to pull bond and equity issues and testing the resilience of this year’s rally in eurozone shares.
Greece had to scale back its ambitions for an issue of government debt after shares in Banco Espírito Santo plunged more than 17 per cent to the lowest price in a year, before Portugal’s stock market regulator suspended trading pending a statement from the bank.
Portugal’s PSI 20 share index closed down 4.2 per cent – its biggest daily drop in more than a year – while the jitters spread across Europe, with Italian and Spanish shares also tumbling. The FTSE Eurofirst 300 share index ended down 1 per cent.
Jim Reid, a strategist at Deutsche Bank, said problems at BES meant that questions about the health of banks in weaker eurozone countries were “back in the spotlight”, as were the still-evolving mechanisms for dealing with struggling institutions.
The turbulence followed an extended period of exceptional low volatility in global markets – which may have encouraged profit-taking. “Given the levels everything had reached, it is not surprising to have a day when everyone reappraises their exposures,” said Matt King, strategist at Citigroup.
A banker who has worked closely with BES said the Portuguese bank had a €2bn-€3bn capital shortfall and the most likely solution was some kind of state-brokered rescue deal, as a private sector solution would take too long. “There are rumours of an M&A solution, but no one has the speed to do the necessary due diligence and move fast enough to do a deal,” the banker said. “This needs a solution now – in the next couple of weeks – and that means a state intervention.”
The Bank of Portugal reiterated on Thursday that “the solvency of Banco Espírito Santo is solid”.
Intervention by the Portuguese government, however, could reignite fears about the potential exposure of weaker eurozone governments to bank sector problems.
Cristiano Ronaldo does not sing particularly well. Portugal had a revolution in 1974. These are two discrete facts. They are also ineluctably associated with Espirito Santo, the Portuguese finance house.
Dire industrial production numbers for France, where output dropped 1.7 per cent for May compared with a month earlier, and Italy, where it fell 1.2 per cent, added to nervousness about the strength of the eurozone recovery.
Amid the sell-off, Banco Popular Español, a Spanish bank, aborted plans to issue a “contingent convertible” bond, or coco, to raise at least €500m. Separately, ACS, the Spanish construction company headed by Real Madrid boss Florentino Pérez, shelved its inaugural euro bond sale.
In Italy, Rottapharm, a pharmaceuticals group, pulled its initial public offering after failing to achieve its target price. Trading was halted in several Italian banks.
Athens had expected strong demand for a Greek bond issue after a debt sale in April attracted €20bn in orders, more than six times the amount sold. But after investors placed orders of €3bn the bond raised €1.5bn.
Yields on Portugal’s 10-year bond rose 21 basis points to close at 3.99 per cent.
German Bunds – often a haven during periods of volatility – rallied with yields falling to a low of 1.17 per cent, the lowest level since early 2013.