Portugal’s Hollow Halo Effect
Portuguese financial assets were battered en route to IMF-EU program exit as the central bank took EUR 4 billion out of remaining emergency liquidity lines to take over family-run Banco Espirito Santo and split it and its Angolan subsidiary into good and bad units. Shareholders and junior bondholders will absorb losses, with yields spiking to 35 percent as exchange trading was suspended. Lisbon and Luanda guaranteed deposits, and officials blamed the debacle on a hidden “Ponzi scheme” after BES was the lone lender to refuse state aid after passing initial stress testing. Millenium and other leading bank shares fell in turn as they may ultimately have to contribute to rescue cost, as parliament threatened to backtrack on public sector wage cuts voted before the collapse. The affair coincided with the 40th anniversary of dictatorship removal and a Moody’s sovereign return to just below investment grade and unemployment and consumer confidence strides. Marginal GDP growth also reappeared in next door Spain with close links as the 10-year benchmark bond yield was a record 2.5 percent bottom. Deflation continues as bank corporate loans are off 10 percent, and a Catalonia independence referendum may soon proceed. The groups have seen housing improvement but operations in Argentina and Venezuela have hit balance sheets. France’s Credit Agricole took a EUR 500 million pasting for its 15 percent stake in BES, following Paribas’ $4.25 billion Q2 setback from its $9 billion US penalty for dealing with sanctioned regimes before Russia’s where it has a big local subsidiary. According to the BIS French claims on Russia are one-third the foreign total, although individually Austrian, German and Italian competitors are most at risk. Cyprus is in the front line of the Ukraine crisis fallout and “geopolitical tensions” may endanger projected GDP growth resumption next year, the IMF believes. Insolvency legislation must be passed by the next installment as NPLs are half the system. Private investors and the EBRD subscribed to EUR 1 billion in new equity for Bank of Cyprus as it was relisted on the stock exchange. Moody’s revealed a positive outlook with the quasi-default grade, but cautioned on medium-term public finance sustainability. The dubious reputation likewise resurfaced as the US Treasury worked with authorities to shutter a Lebanese-controlled conduit for money laundering.
Greek shares swung from last year’s outperformers to negative results as it too approaches the Troika end game with lingering difficulties and contingency demands. Output rose marginally in the second quarter on a 15 percent first half tourism increase and half a percent full year growth is forecast as the unprecedented outside official assistance enters the last stretch before another possible debt relief and extended repayment phase. An EU task force has been proposed to extend monitoring but the hefty debt/GDP ratio which motivated the original mobilization will not start to descend until next year when fresh leadership associated with early elections could also portend a hollow victory.
