Worries over the health of one of Portugal’s largest financial groups unsettled investors across Europe Thursday and spilled over onto the U.S. stock markets.
The turbulence provided an unwelcome reminder of the tensions that gripped Europe for much of the past few years, when concerns were high over the state of the banks and public finances in a number of countries that use the euro. Investors are fretting about whether Europe’s financial problems are truly healed or whether deeper problems remain to be discovered.
The current tensions are centered on the Espirito Santo group of companies, which includes Portugal’s largest bank, Banco Espirito Santo, amid fears over the nature and scale of its financial problems. The company has ties to Miami.
Share trading in the bank was suspended after a precipitous fall of more than 16 percent, dragging the Lisbon stock exchange down by 4 percent and pushing up the yield on Portugal’s benchmark 10-year bonds by 0.21 percentage points to 3.97 percent. Sentiment was knocked across Europe, with the Stoxx 50 index of leading European shares down 1 percent.
In the U.S., the Dow Jones industrial average and theStandard & Poor’s 500 index slipped 0.4 percent, while the Nasdaq dropped 0.5 percent
The aftershocks are being felt in Miami. Banco Espirito Santo in Lisbon owns 99 percent of Espirito Santo Bank Florida, a Florida-chartered bank based in Miami.
In an interview Thursday, Fred Reinhardt, chairman and chief executive of Espirito Santo Bank in Miami emphasized the separation between the Miami bank and the situation in Portugal. Espirito Santo Bank has $750 million in assets and 120 employees, and also operates a broker-dealer subsidiary for clients, with $850 million under management.
“We have our own capital, we have our own board of directors, we have our own governance, we have our own regulators — the [Federal Deposit Insurance Corp.] and the Florida Office of Financial Regulation,” Reinhardt said.
The Miami bank focuses on wealth management, residential lending for foreign buyers in Miami and trade finance, he said.
“We are staying our course,” Reinhardt said. “We are being proactive, talking to our clients and explaining the situation there, and very much reassuring them that this is a U.S. bank and we feel very comfortable in the long run and we are going to be fine.”
Portugal became the third eurozone country after Greece and Ireland to require a financial rescue when it got a $106 billion bailout in 2011. In return, the government has enacted tough austerity measures, such as cutting spending and reforming the economy.
Portugal’s efforts in recent years to get its public finances into shape have helped it regain the trust of investors. That was manifested in the fall in the interest rates the country pays on its borrowings. As a result, Portugal concluded its three-year international bailout program in May, with the government confident it can raise money in the markets.
The government insists Banco Espirito Santo is solid, but it is being engulfed by a cascade of bad news from other family group companies. Investors fear the bank is vulnerable because of crossover holdings and loans between group companies. Also, Portuguese newspaper reports suggest the full scale of the group’s financial difficulties have not yet emerged.
Concerns first arose when an audit requested by Portugal’s central bank in May found “serious” accounting irregularities at Luxembourg-based Espirito Santo International, an unlisted holding company that is the largest shareholder in a subsidiary, Espirito Santo Financial Group S.A., which in turn holds the Espirito Santo family’s 25 percent of Banco Espirito Santo.
The bank’s other shareholders include France’s Credit Agricole, Brazil’s Banco Bradesco and Portugal Telecom.
On Wednesday, Espirito Santo International reportedly said it had delayed a short-term debt payment. The same day, rating agency Moody’s downgraded by three notches the subsidiary, Espirito Santo Financial Group, expressing concern about “the lack of transparency” and the extent of links between its companies.
Reinhardt said that on July 31 his bank’s parent, Banco Espirito Santo, will have a special meeting of shareholders in Lisbon and will elect a new chief executive and a new chief financial officer, both of whom are being nominated by the Bank of Portugal, the country’s central bank. Twenty-five percent of the bank is owned by Espirito Santo Financial Group,
The Espirito Santo group of companies grew out of a banking dynasty dating back to the 19th century. The group also owns Portuguese and international interests in industries such as tourism and private health care.
Portuguese banks recorded heavy losses during Portugal’s bailout but passed the so-called European “stress tests” meant to assess whether they were sound.