Thursday saw the first meaningful bout of market contagion in Europe (and on into Wall Street) for this year at least and probably some way further back than that. The $64 million question is whether it will spiral or fizzle out.
Portugal’s largest listed bank, Banco Espirito Santo, whose shares were suspended yesterday, is in trouble but to the untrained eye it looks like contained trouble. So was this more of a catalyst for investors already wondering about the durability of strong and long rallies in stocks and government bonds to take some profit out? Or are they right to be genuinely worried?
Answers above my pay grade, I’m afraid, but it brings us back to the warning from the Bank for International Settlements – the central bankers club – nearly two weeks ago that “euphoric” markets had got dangerously ahead of the economies that underpin them. There are certainly signs that the euro zone recovery is gaining no momentum.
The losses are on loans to the business empire of the founding family behind BES and the bank insists it is not at risk of running short of capital. Portugal’s central bank has said similar. Even if that was not the case, the Portuguese government is thought to have ample reserves for bank recapitalizations and the EU rules are quiet clear.
If a bank was about to fall, before any public money was used, shareholders and junior bondholders would have to stump up. So the threat to Portugal’s public finances, at least, would appear to be contained. None of that means that the market wobbles are going to subside quickly and it would be no surprise if a new focus was put on other weaker banks in the currency bloc ahead of stress tests later in the year. Having said that, European shares are being called slightly higher at the open.