PGAL - portugal etf

Portugal banking crisis sends tremors through Europe

8:31PM BST 10 Jul 2014 Portugal’s regulator suspends trading of Banco Espirito Santo after its share price crashes 17pc, reviving worries about the health of Europe’s banks A mounting crisis at one of Portugal’s biggest banks and signs of a deepening economic slowdown in Europe have sent tremors through financial markets, triggering a sharp fall on European bourses and a flight to safety across the world. Portugal’s regulator suspended trading of Banco Espirito Santo after its share price crashed 17pc in Lisbon, reviving worries about the underlying health of Europe’s banks. The STOXX index of European lenders fell to its lowest this year following a bank run in Bulgaria and a profits shock from Austria's Erste Bank. The index is down 11pc since early June. Yields on Portugal’s 10-year debt surged 20 basis points on Thursday to 3.95pc, with contagion spreading to Greek, Spanish and Italian debt. Capital Economics said the ructions in the bond markets confirm fears that Europe's tentative banking union has failed to stabilise the system. “Policymakers have done little to weaken the 'doom loop' between banks and sovereigns in the eurozone’s periphery,” it said. Portugal’s stock market fell 4pc in a seventh day of declines on fears that a nexus of interlinked companies would be drawn into the squall. Spain’s IBEX was off 2pc and Italy’s MIB down 1.9pc, with knock-on effects spreading to London and New York. “Banco Espirito Santo is far too small to have any systemic impact itself. What worries markets is that European banks have been selling off hard for several weeks and now we have had a whole string of economic surprises,” said Hans Redeker, currency chief at Morgan Stanley. “Foreign funds have invested €430bn in European equities and €230bn in bonds since August 2012. If they think Europe’s recovery is stalling they may start pulling it out again." Data released on Thursday showed that industrial output for May fell 1.7pc in France and 1.2pc in Italy. It has fallen for three months in a row in Germany, hit by Russia’s recession and weakness in China and Japan. “The German economy is highly leveraged to world trade and that is in contraction,” said Dario Perkins, from Lombard Street Research. “The CPB’s World Trade Monitor has been negative for the past two months on a three-month moving average, and we haven’t seen anything like that since the collapse before the Lehman crisis.” There has been further evidence of Asia’s slowdown this week. Japan’s core machinery orders fell by a record 19pc in May, while China’s car sales fell 3.4pc in June. Korea’s central bank cut the country’s growth forecast on Thursday. Jacques Cailloux, from Nomura, said the business cycle indicators for Europe have reached an inflexion point. “We have had our first warning signal and we think we have entered a slowdown. We are in a sort of 'Japanisation’ in Europe and we’re not going to come out of this soon,” he said. The European Central Bank cut its deposit rate below zero in June and is preparing a €1 trillion blast of cheap credit for banks later this year, but it will be months before this has much effect on the real economy. Loans are not as high-octane as quantitative easing since they must be swapped for collateral. Critics say the ECB has waited too long to take radical action, allowing the M3 money supply to stall. Loans to the private sector are contracting at a 2pc rate as banks shrink their balance sheets to meet tougher rules. Eurozone inflation has dropped to 0.5pc, a level that pushes the weakest Club Med economies into incipient deflation and plays havoc with their debt trajectories. Any sign that recovery may be faltering is a serious threat to Portugal, which took a gamble by refusing to accept a backstop credit line on exiting its Troika programme in April – defying advice from the International Monetary Fund. Premier Pedro Passos Coelho was convinced that Portugal could raise its own funds on the markets and vowed to break free of an EU-IMF Troika rescue programme. But the country may pay a high price as waves of debt redemptions hit over the next two years. Public debt has jumped from 94pc to 129pc of GDP over the past three years, in part due to the vicious circle of austerity itself. It is nearing unsafe levels for a country with no sovereign currency to take the strain. The European Commission is banking on a new cycle of economic growth to stabilise the debt and then whittle down the ratios. Any economic relapse would push Portugal towards a compound debt spiral. Portugal’s PS1 20 share index is down 22pc since early April, a clear sign of underlying strains in the economy that may have been misread by global investors and the government. The panic selling this week followed reports that the Espirito Santo nexus of family companies had missed debt payments and was seeking court protection against creditors. The Espirito Santo Financial Group, which owns a quarter of the bank, admitted that it has “material difficulties”. The central bank issued a statement insisting that the lender is “ring-fenced” and not affected by family problems, but this failed to restore calm. Moody’s has slashed the bank’s credit rating three notches to Caa2, close to default, saying a lack of transparency made it hard to judge what was happening. The IMF said on Thursday that there are “pockets of vulnerability” in the Portuguese banking system but refused comment on Espirito Santo directly. The Portuguese Treasury has €6.4bn in reserve to support the banks in extremis. Barclays said it was remarkable that the problems had not been detected while Portugal was under the miscroscope of the Troika for three years, suggesting that there may be “other latent problems in the system”. It is not clear why the Espirito empire is in difficulty. Portugal’s private sector is highly leveraged, with debts equal to 250pc of GDP. Analysts say it is remarkable that so few problems have come to light given the ferocity of the deflation squeeze. Megan Greene, from Maverick Intelligence, said Portugal would probably weather this storm but eventually the hard mathematics of the debt burden would catch up with them. “Portugal will need debt restructuring in the end because they are not going to be able to grow their way out of this,” she said.

When a large bank fails in any country, the economy of the country will take a huge hit. Simply because the credit will flow much slower than normal. And every economic event requires a credit in a way or another.

Did they not say the same thing about Spain, Italy? Did not work then for those who dumped the stocks, did it?

Its just fear so far.
Nothing has been firmed

This fear comes after an extended period of complacency with cheap credit. There is a difference.

hmm.. wonder if will cause contagion.. reminds me of my nus lecturer who opined that Euro currency will eventually collapse because the economic structure of each of those 20+ countries are inherently different..

"Japanisation" of Europe for 10-20 years.. wah, cannot imagine ahh..

I beg to differ. Different states of the US have different economic structure and different budget and even different laws. But they still all use US dollar.

(11-07-2014, 08:44 PM)Art or Science Wrote: hmm.. wonder if will cause contagion.. reminds me of my nus lecturer who opined that Euro currency will eventually collapse because the economic structure of each of those 20+ countries are inherently different..

"Japanisation" of Europe for 10-20 years.. wah, cannot imagine ahh..

This is a loaded question but freedom is right up to a point. People in east and west coast of USA call themselves Americans, but this is not the case in Eurozone. they have yet to reach that stage of helping and supporting each other unilaterally, and identifying as europeans (?) hence the oft quoted uneven economy is a concern but not a deal breaker if the structure is right

And to address this concern we had the Maastricht treaty and the exchange rate mechanism with strict boundaries or budget deficit and inflation. But as per discussed previously, the fall of East Germany putting stress on German budget deficit, as well as the EU trying to absorb the Warsaw Pact region, put a serious strain on the "strict" guidelines. People say the fragility of the Euro is because of this concern but IMHO it is more a function of politics overriding the economic discipline.

Yup, politics. Not sure if any in depth study has been done to determine if the countries using Euro has benefited and grown economically. Or only selected countries?

What if we are using ASEAN dollar?

By virtue of targeted inflation not higher than 3%, we can guess that the purpose of the Eurozone is not high growth

There were political considerations post WW2 as well as economic considerations from reducing FX friction and bigger common markets. In other words the original idea from the 70s is to have a market that can rival US, especially post Bretton Wood

ASEAN dont have this background nor do we have the ambition to counter a specific currency. An ASEAN currency was mooted on and off, but they had to have an anchor just like original Euro anchor was Pound, Franc and Mark, with the latter the obvious de facto. Guess who will be the anchor and burden of ASEAN currency will lie?