Espirito Santo suspended IBEX shudders

Eurozone concerns were back in focus today after Portugal’s largest conglomerate Espírito Santo International delayed the repayment of some of its short-term debt this week. Although the company is private and little is known about its finances, Portugal’s central bank sparked fresh worries after disclosing the company was in a “serious financial condition” and found inappropriate accounting practices.

Fears over Espirito Santo may be played down in that it is a local problem as it accounts for less than 20% of the nation’s total banking assets 0.25% of the eurozone banking sector.  But France’s Credit Agricole, Europe’s 18^th largest bank in market capitalisation, owns 15% of BES. Its operations are largely local, but the 6% loan exposure to Spain may be an excuse for causing jitters in its bigger neighbour.

Among Espírito Santo International’ s banking units is Banco Espírito Santo SA–Portugal’s second largest lender,  whose shares have been after dropping 17% on the day, bringing losses to 46% year-to-date. Trading in parent company Espirito Santo Financial Group, were also suspended.

There is talk that the Portuguese lender suffers a €2bn-€3bn capital shortfall and the more likely solution would be a state-backed intervention rather than a takeover from a local player.

Portuguese authorities have already forced the bank to raise €1 billion to strengthen its finances, and are in the process of overseeing the appointment of new management. That will end the control of the Espirito Santo family and improve corporate governance at the bank.

It may be some consolation that the area’s European Stability Mechanism remains fully intact in the event that any Eurowide rescue plan is called in place.

Rising sovereign yields, tumbling IBEX

Sovereign bonds in Southern Europe have started to sell-off well before the BES news. Portugal’s 10-year yield rose for the 4^th consecutive week to reach 3.98%, while its Spanish has regained its 55-DMA for the first time this year.  Yields on these sovereign bonds are trading 60% below the Eurozone crisis of summer 2012, which may give comfort to their owners.

But in the case of equities, Spain’s IBEX-35 could be at risk falling into a seasonal vicious cycle. The index has sustained sharp losses around this time of the year in each of the last three years. Down 6.5% from its 2014 highs, the IBEX risks adding another 4% of losses, to test its 2-year support. A close below 9,700 next month will raise the red flag to Eurozone equity holders.