By James Saft
(Reuters) – Banco Espirito Santo’s woes may not reignite the euro crisis but could give useful information about who will pay the inevitable costs.
Under pressure after the discovery of financial irregularities at its family-controlled parent, BES is shaping up as a potential test case of the euro zone’s commitment to punishing bad decisions and rewarding good ones.
The long-term rewards could be considerable but they would come at a short-term cost, especially for investors.
At issue is who will foot the bill for any shortfall if losses accruing to BES swamp its capital. While BES, Portugal’s largest listed bank, said last week that it had 2.1 billion euros in capital above regulatory minimums, against only 1.15 billion in exposure to the Espirito Santo family empire, Moody’s and Standard & Poor’s both slashed its credit ratings further into junk territory.
One eyebrow-raising aspect of the ratings agencies’ judgment was that both held BES’s senior debt rating to be better than that of its parent, the reverse of the norm. Both agencies explicitly cited the possibility that Portugal might support the bank, potentially bailing out both it and its creditors.