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The Holly Spirit, a tale of the European South

July 14, 2014

Published in ‘New Europe’ online edition

espirito_santo_portugalThe tale is well known in every Southern European country. It all begins with a prominent banker, who usually belongs to a powerful family. The family runs a business empire, spreading to several economic sectors. Family members are connected to politicians and other elite circles in the country. Those circles never question the family’s ways of conducting business. The bank is the cornerstone of the business empire; its role is to channel funds to the other activities. While everyone knows that their practices aren’t exactly transparent, no one is willing to question them. When wrongdoings become too obvious, the authorities order an audit of the group. The audit concludes that some ‘accounting irregularities’ did take place, but no further action is taken. New loans are concluded and more bonds are issued, so that no disturbance occurs in the market. Right up until the group’s problems can no longer be covered. At which point, nobody lends to the group or buys its bonds, and the ‘accounting irregularities’ become a liquidity crisis. A crisis that spreads across the board in all local markets, before becoming international and shaking world markets. End of story.

Thus, it came as no surprise on Thursday, when we learned that ‘Banco Espirito Santo’ of Portugal was in this kind of situation. The Espirito Santo family’s Luxembourg-based group, ‘Espírito Santo International’ has significant stakes in Portugal Telecom, the Tivoli Hotels & Resorts chain, as well as hospitals and real estate investments in Portugal and Brazil. The bank itself has lent more than a billion euro to its parent company, a member of the group.

All this would have been just fine, had Portugal been isolated like some island in the South Pacific. Problem is, Portugal is a member of both the European Union and the Euro zone. Immediately after the disclosure of Banco Espirito Santo’s problems to meet payment obligations, a chain reaction started in Europe’s periphery. A Spanish bank called off its bond issue, an Italian company halted its IPO, and trading of several Italian banks was suspended, while Greece had problems with its government bonds issue and finally managed to sell only half of the initially intended amount. Eventually, the Euro fell in the currency markets, as international investors were liquidating significant parts of their euro-denominated assets.

The question is, why can a liquidity problem in a single bank of a Southern European country immediately set the markets in such a turmoil? Especially now, when the worst of the euro sovereign crisis is supposedly over. And what can the relation between a Portuguese bank and the New York Stock Exchange be? Is the market looking for a reason to pull back, or are there any other reasons?

Well, the main issue, then again is trust. Nobody really believes that the Euro zone’s problems are over, neither that its banks have been properly cleaned up from their past sins. Even the much advertised ‘stress tests’ performed by ECB do not seem to provide sufficient comfort to investors. Most of the structural reforms remain to be done in the troubled Southern European economies to restore confidence. Meanwhile, even the slightest crack in one of its financial institutions will be enough to shake international markets.


From → Views & Opinions

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