Portuguese bank collapses

The collapse of Banco Espirito Santo has raised fears there could be other nasty surprises lurking in Europe's banking sector.

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

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 inThe Independent. Banks in Italy,Portugal and Spain had the highestnon-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.

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