Banco Espírito Santo?s crumbling financial health has caused the Spanish banking stocks to lose 9 billion euros as fears of contagion spread in advance of ECB stress tests. This latest crisis in Portugal shows that after six years of economic turmoil in Europe, the banking sector is still feeble.
Any bad news, wherever it comes from, could launch us back into the depths of the financial crisis. The Portuguese government says that the situation is under control, but outside of the country there are doubts about whether this is true, especially after finding out that the family?s holding company is in the middle of a bankruptcy proceeding. The structure of one of the most significant companies in the country has lefts its standout company, Banco Espírito Santo, with 1.8 billion euros of toxic assets. This figure is not settled, and nor is the BES crisis. Prime Minister Passos Coelho wants to keep the bank out of bankruptcy court by raising capital. In fact, Portugal?s banking supervisor has asked some other banks, including Santander, and investments funds if they want to buy a stake in BES. If it?s not a black hole, then BES could be a good payoff. These private investors could be BES?s saving grace.
Portugal is smart to try to rely only on private funds to save the banking sector. But it should be careful to make sure that the funds are managed well and that people aren?t speculating. In Spain, the banking supervisor has kept people from buying huge banks simply to flip them for a tidy profit, which is the opposite of what a company looking for stability needs.
