Following this morning's farce of huge investor demand and then Bank of Portugal's Costa 'hoping' for demand from investors willing to pile more money on losing money into Espirito Santo, it appears things have escalated rapidly...
*ESPIRITO SANTO INTERNATIONAL SAYS IT CAN'T MEET OBLIGATIONS
*ES INTERNATIONAL APPLIES FOR `CONTROLLED MANAGEMENT' REGIME UNDER LUXEMBOURG LAW
The "controlled management" application is the equivalent of declaring a breakup or controlled bankruptcy process (as we explained here). ESI is the ultimate HoldCo in the Banco Espirito Santo family.
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
Slowly but surely, all those cans that many hoped were kicked indefinitely into the future, are coming back home to roost. The biggest impact on global risk overnight have been undoubtedly the expanded Russian sanctions announced by Obama yesterday, which have sent the Russian Micex index reeling to six week lows (as it does initially after every sanction announcement, only for the BTFDers to appear promptly thereafter), with the biggest hits saved for the named companies such as Rosneft -5.6%, Novatek -5.1%, and others Alrosa -5.7%, VTB Bank -4.3%, Sberbank -3.4% and so on. Then promptly risk off mood spilled over into broader Europe and at last check the Stoxx600 was down 0.8%, with Bund futures soaring to record highs especially following news (from the Ukraine side) that a Russian warplane attacked a Ukrainian fighter jet. Not helping matters is the end of the dead cat bounce in Portugal where after soaring by 20% yesterday on hopes of a fresh capital infusion, Espirito Santo has once again crashed, dropping as much as 11%, driven lower following downgrades by both S&P and Moodys, as well as the realization that someone was pulling everyone's legs with the rumor of an equity stake sale.
This week, 70 years after Bretton Woods, leaders from China, Russia, India, Brazil, South Africa, and several other nations are hard at work in Fortaleza, Brazil creating a new development bank that will compete against the US-controlled World Bank. This is a major step in an obvious trend towards a new financial system. Every shred of objective data is screaming for this to happen. It’s a different world. Everyone realizes it except for the US government, which is still living in the past where they’re #1 and get to call all the shots.
What does Yellen know? Nothing apparently (if she says 'sell') US equity markets, juiced by China's GDP data (but missing China's retail sales and home price slump) and helped by Portugal 'reassurances' that have yet to materialize, are soaring this morning... VIX is back at a 10-handle as Dow hits record highs, the S&P nears record highs and even small-cap, social media, momo, tech fantasy stocks are ripping... you can't keep a good market down... It seems "fight the Fed" is the new "Don't fight the Fed"
Banco Espirito Santo stocks and bonds are up notably this morning following comments from the Portuguese Central Bank that shareholders are interested in injecting more capital into the failed bank. This has - for now - reassured investors that a bail-in won't be necessary but, as Jefferies notes, "it's hearsay for the moment but it’s helpful." Chatter that "someone" is willing to throw another EUR 2 Billion at this "troubled" financial entity was enough to spur risk-on buying in most of European stocks with Portugal PSI20 surging almost 4%. The question is - after all this additional capital (at what will likely be a major haircut to current equity prices), who will do business with this bank (and why?) after already suffering through the fear of deposit confiscation or debt haircuts?
If last week's big "Risk Off" event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday's acceleration in the Portuguese lender's troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors. No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the "good", if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.
The problem for the ECB, of course, is that Espirito Santo and Erste are not isolated incidents, any more than Laiki and Fortis and Anglo Irish and WestLB and BMPS and... should we go on? ...were isolated incidents. "...with apologies to Lewis Carroll, here’s the choice facing our modern-day Alice (Mario Draghi) – does (s)he sing a lullaby that keeps the Red King (investors) sleeping for a few more years, albeit at the cost of drinking a terrible potion that will turn her into a hideous giant... or does she let the Red King wake up, shattering the dream and risking the existence of everything, herself included, but preserving the story of her beautiful face and form?" If we were betting men (and we are), we’d wager on Draghi drinking the potion and keeping the dream alive, no matter how complicit it makes him in preserving a very ugly and very politically-driven status quo. But there’s a non-trivial chance that it’s just too much to swallow...
While Banco Espirito Santo continues to exist on fumes and life support (that last ditch equity injection by Baupost a week ago may not have been Seth Klarman's wisest investment), a key link in the Espirito Santo Holding Company structure is preparing to default. According to Reuters:
ESPÍRITO SANTO GROUPS HOLDING COMPANY RIOFORTE PREPARING TO FILE FOR CREDITOR PROTECTION IN LUXEMBOURG - SOURCES
For those confused, "creditor protection" = bankruptcy.
Portugal Contagion Spreads: Espirito Santo To Default On Portugal Telecom Loan, Business Lending Drops Most On RecordSubmitted by Tyler Durden on 07/15/2014 07:27 -0500
Despite reassurances from US asset-gatherers and TV 'personalities' that Portugal must be fixed (because US equities are up), it is anything but. Today's triple whammy from the 'recovered' Portugal starts with Banco Espirito Santo bonds and stocks hitting new record lows (down over 10% more on the day). The contagion has rippled across to Rioforte, which controls Grupo Espirito Santo's non-financial arm - and is likely to default on a EUR 847 million payment to Portugal Telecom. And just to add further salt to that wound, Portuguese business lending in May collapsed at a record pace (down 8.23%). But apart from that, yeash Portugal is all fixed and their sovereign bonds are worth every penny...
It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe's growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF "forecast" for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this "not so lonely" cockroach.
To much trumpeting the IMF have kindly agreed to help out desperate and war torn Ukraine. How wonderful they are we are all meant to think, but the truth couldn’t be more opposite. but in reality the IMF has a very different purpose from that which is stated. If you look at the history of the IMF’s intervention in countries around the world you will see a trail of disaster and looting that repeats time and time again wherever they go.
Presented with little comment aside to remind the gung-ho stock-buyers who have been convinced (because the mainstream media has moved on from Banco Espirito Santo contagion concerns) that Portugal is anything but fixed. No government bailout coming means bail-ins and bail-ins means confiscation... Banco Espirito Santo bonds are collapsing today... down almost 8 points as they know this doesn't end well.
- Secret Path Revealed for Chinese Billions Overseas (BBG)
- Traders Flood U.S. With $3.4 Trillion of Bond-Auction Demand (BBG)
- Just in time to cover bad earnings in a massive $3.8 billion "one-time charge": Citi says to pay $7 billion to settle securities investigation (Reuters)
- Troubled Epirito Santo family loosens grip on Portugal's BES (Reuters)
- BES puts in place new executives after central bank push (Reuters)
- Bank of China-CCTV drama may reveal power struggle in Beijing (SCMP)
- Portugal speeds up Banco Espírito Santo management changes (FT)
- Dark pool probe builds pressure on Barclays boss (Reuters)
- Russia Vows to Respond After Shelling From Ukraine (BBG)
- Ukraine forces end rebel airport blockade (Reuters)
- Obama Contends With Arc of Instability Unseen Since '70s (WSJ)