One of Portugal's biggest companies - Espirito Santo International SA - is in a "serious financial condition" according to a central bank driven external audit by KPMG identified "irregularities in its accounts." Rather stunningly, the details are nothing short of ponzi-like as WSJ reported in December [7] that Espírito Santo International was highly leveraged and had been relying heavily on selling debt to an investment fund held by the financial group (i.e. funding debt issuance in one entity with another) and overvaluing hard-to-value assets (ring any bells?).
However, the 'ponzi-like' maneuver, as WSJ concludes [8]shows that while legal and in line with regulatory rules, highlights how corporations, including banks, used financial gymnastics to survive the region's financial crisis.
Given the massive domestic bank demand for sovereign paper, one has to wonder if the sudden 60bps spike in Portuguese bond risk is a signal that all is not well in the European periphery.
As WSJ reports, [8]
Espírito Santo International SA, a large Portuguese conglomerate whose financial practices have been subject to criticism by outside experts, is in a "serious financial condition" and its accounts have "irregularities," according to a document published by one of the company's affiliates.
...
A regulatory filing late Tuesday by Banco Espírito Santo, which is partly and indirectly owned by the conglomerate, said an external audit ordered by the country's central bank into Espírito Santo International's 2013 results uncovered a range of problems.
The auditor, KPMG, "identified irregularities in its accounts and concluded that Espírito Santo International is in a serious financial condition," the bank said in the prospectus that it issued as it prepares to sell €1 billion ($1.37 billion) of shares.
The details of the 'irregularities' are stunning in their ponzi-like nature...
The Wall Street Journal reported in December that Espírito Santo International was highly leveraged and had been relying heavily on selling debt to an investment fund held by the financial group and marketed to clients of the bank.
It also reported that accounting experts raised questions about the value Espírito Santo International gave to its stake in Espírito Santo Financial Group. The valuation was much higher than the market value of Espírito Santo Financial.
While the bank isn't responsible for the parent company's problems, the filing warned, the bank nonetheless could face reputational damage.
Perhaps that is why the sudden rush for the exits in the increasingly tied-at-the-hip sovereign bond market has occurred recently...
[9]
If one goes - the other follows...
As WSJ noted in December, [7] this kind of ponzi-like move remains widespread... and entirely ignored by most...
But the maneuver, while legal and in line with regulatory rules, highlights how corporations, including banks, used financial gymnastics to survive the region's financial crisis.
As the mirage of recovery in financials is maintained by the totallifting of all accounting standards and transparency.