It has been a deja vu session of that day nearly a month ago when the Banco Espirito Santo (BES) problems were first revealed, sending European stocks and US futures, however briefly, plunging. Since then things have only gotten worse for the insolvent Portuguese megabank, and overnight BES, all three of its holdco now bankrupt, reported an epic loss despite which it will not get a bailout but instead must raise capital on its own. The result has been a record drop in both the bonds (down some 20 points earlier) and the stock (despite a shorting ban instituted last night), which crashed as much as 40% before stabilizing at new all time lows around €0.25, in the process wiping out recent investments by such "smart money" as Baupost, Goldman and DE Shaw. The result is a European financial sector that is struggling in the red, while adding to its pain are some large cap names such as Adidas which also tumbled after issuing a profit warning relating to "developments" in Russia. Then there was European inflation which printed at 0.4%, below the expected 0.5%, and the lowest in pretty much ever, and certainly since the ECB commenced its latest fight with "deflation", which so far is not going well. The European cherry on top was Greece, whose dead cat bounce is now over, after May retail sales crashed 8.5%, after rising 3.8% in April.
Having waited until after the US equity markets closed, Portugal's troubled Banco Espirito Santo unveiled an enormous EUR 3.577 Billion loss - that is 15 times larger than the loss the bank suffered a year earlier. The data - to end-June, before the crisis really got going - already shows notable deposit flight, a 73.1% plunge in banking income, and a EUR 3 billion collapse in repoable assets (i.e. liquidity). On the heels of this Portugal's securities regulator has enforced a short-selling ban on BES... we suspect they would not have done that if all was systemically well in Portugal.
There are grounds for optimism about Europe’s single currency area. Yet beneath the surface of favorable sentiment towards the euro zone, the seeds of the next financial crisis are being sown. If markets connected all these dots - a weak and fragile economic recovery, the failure to break the “doom loop” between banks and sovereigns and, most importantly, scant prospect of a more secure political and economic union - the glaring disconnect between asset prices and underlying fundamentals in the euro zone would be a source of much greater concern.
Portugal's PSI20 plunged over 3.4% today extending recent losses after its dead-cat-bounce, leaving the index near its lowest since October 2013. Interestingly peripheral bond spreads (and IG/HY credit spreads) compressed while equity markets all dumped across Europe amid concerns of blowback from Russia. As the sell-off accelerated into the close, credit markets also tumbled. An initial rally in financials gave way rapidly as US opened and rumors of G7 statements and Russian retaliation spread. Europe's VIX closed just shy of 18.00 - its highest close since early May. Banco Espirito Santo fell another 10% to record lows ahead of tonight's earnings.
US and European financials faded notably after Europe and then US unveiled new sanctions against Russia today. Most notably, the decision to sanction Russia's largest banks (and ban trading and capital markets access) has ramifications for the global financial system's stability given the increasingly inter-connected nature of the world. For that reason, we thought Bloomberg Briefs' chart of the most exposed banking systems by nation to any systemic issues in Russia would be useful.
With all other operating holdcos having already declared bankruptcy, the anxiety over Banco Espirito Santo is growing (despite DE Shaw and Goldman Sachs recommending investors buy the shares). Despite Bank of Portugal reassurance last night that "BES is able to raise capital), the stock is plunging on news of "unexpected facts" this morning...
*BANCO ESPIRITO SANTO SAYS SHAREHOLDER MEETING WAS CANCELLED DUE TO "UNEXPECTED FACTS''
*BANCO ESPIRITO SANTO FALLS MORE THAN 13% IN LISBON TRADING
Remember, this is systemic (as the Portugues President has warned), and the contagion is potentially global... not "contained."
Overnight markets have been a continuation of the relative peace observed yesterday before the onslaught of key data later in the week, with the biggest mover standing out as the USDJPY, which briefly touched 102 before sliding lower then recouping losses. This sent the Nikkei 225 up 0.57% despite absolutely atrocious Japanese household spending data, coupled with a major deterioration in employment: at this rate if Abenomics doesn't fix the economy it just may destroy it. Aside from that the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. And while the SHCOMP is starting to fade its recent euphoria and China was up only 0.24%, Europe continues to cower in the shade of Russian sanctions as both German Bund yields rose to record highs, and Portugal's BES tumbled by 10% once again to 1 week lows. Today Europe is expected to formally reveal its latest Russian sanctions, which should in turn push Europe's already teetering economy back over the edge.
As multiple entities of one of Europe's largest banking dynasties rapidly crumble into bankruptcy, there are bound to be ramifications. With even the Portuguese President fearing Espirito Santo's systemic impact, we thought the following chart from Thomson Reuters would highlight the fact that is far more than just a Portugal thing... it has notable consequences for large businesses from Brazil to Mozambique.
With peripheral European sovereign bond yields at or near record lows, no matter how much GDP gets downgraded (Italy), banking system collapses (Portugal), or loan losses surge (Spain); things must be great for borrowers, right? Wrong! And this is exactly what keeps Mario Draghi up at night... In fact, as the following dismal reality chart shows, real corporate lending spreads are at record highs... crushing the credit-created-growth dream of a European Renaissance.
Having admitted that the banking system problems in Portugal could be systemic, the President has a bigger problem now as the 3rd (and final) Holdco of the Banco Espirito Santo capital structure fiasco just filed for bankruptcy:
*ESPIRITO SANTO FINANCIAL GROUP SEEKS PROTECTION FROM CREDITORS
First it was ESI (storm in a teacup), then RioForte ("contained"), and now ESFG ("systemic"), and given the CEO's recent "detention" for money-laundering, we wonder how long before Banco Espirito Santo is forced to liquidate?
Curious why Portugal's second largest bank is in dire straits on the verge of default and as we reported yesterday, is threatening to impact - adversely - Portugal economy should the bankruptcy chain that has already claimed two of its HoldCos continue further? Then perhaps ask the following man: Richard Salgado, who until last month was CEO of Banco Espirito Santo and as of moments ago has been detained in a money laundering investigation.
When it comes to the apocalypse, Krugman likes to have his apocalyptic cake and eat it too. Krugman says that the recent concern about “debts and deficits” was a “false alarm.” He attempts to paint those who were concerned about the debt crisis as scare mongers. He sarcastically says that “the debt apocalypse has been called off.”
Despite yesterday's lackluster earnings the most recent market levitation on low volume was largely due to what some considered a moderation in geopolitical tensions after Europe once again showed it is completely incapable of stopping Putin from dominating Europe with his energy trump card, and is so conflicted it is even unable to impose sanctions (despite the US prodding first France with BNP and now Germany with the latest DB revelations to get their act together), as well as it being, well, Tuesday, today's moderate run-up in equity futures can likely be best attributed to momentum algos, which are also rushing to recalibrate and follow the overnight surge in the AUDJPY while ignoring any drifting USDJPY signals.
As RioForte joins its parent ESI in bankruptcy, in a strangely honest turn of events from a European leader, Portugal's President Anibal Cavaco Silva warned on Monday that fallout from the financial troubles of the founding family of Banco Espirito Santo (BES) could affect the wider economy. With Portugal's hope-strewn GDP growth expectations at only 0.9% for 2014, they do not have much room for disappointment before the nation (whose yields remain near record lows) double- or triple-dips back into recession. Silva concluded, "We cannot ignore that there will be some impact on the real economy," which is odd given every talking-head has explained it is "contained" and "priced-in."
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