Portuguese bank collapses

Portugal’s largest lender, Banco Espirito Santo (BES), has collapsed amid a series of sudden and unforeseen losses. A fortnight ago, regulators appeared convinced that the bank was solvent. Now they are to use €5bn left over from the country’s international bail-out fund to patch up the huge hole in BES’ balance sheet.

Meanwhile, Italy fell in to recession, with GDP shrinking by 0.25% in the second quarter, following a 0.1% decline in the first.

What the commentators said

BES and the Portuguese authorities violated the first two rules of crisis PR, said Lex in the FT. One: “get everything bad out as fast as you can”. Two: “make completely sure it is everything”. Not only were loses worse than initially thought, but the extent of BES’ exposure still isn’t clear either.

The worry now is that more nasty surprises could be lurking in Europe’s banking sector. Unlike its US and the UK counterparts, Europe hasn’t forced troubled banks to come clean about their losses and recapitalise, which is one reason lending has been so subdued, said Paul Taylor on Reuters.com.

Now the European Central Bank is conducting a review of bank assets and appears to have helped highlight problems at BES. So what else might it sniff out?

“The spotlight is likely to shine on the eurozone periphery,” said Ben Chu in The Independent. Banks in Italy, Portugal and Spain had the highest non-performing loan ratios in 2012.

The International Monetary Fund thinks those states’ banks face around €250bn of potential losses in the next two years, and only Spain’s banking system has enough cash to cover this.

So investors may need to stump up again – and if they won’t, governments could have to step in. The fear of bankrupt banks bankrupting governments, a hallmark of the euro crisis, could soon return.

Merryn

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