The European markets have been exuberant for months. Propelled by an improving economic climate, investors have been eager to make bold bets on risky assets such as Portuguese bonds, Spanish construction companies and Greek banks.
But investors received a jolt this week when shares of Portugal’s second-largest bank, Banco Espirito Santo, were suspended from trading Thursday, prompting fears that the bank might need to be rescued. The move sent high-flying stocks and bonds in Portugal plummeting, forced two Spanish companies to suspend bond offerings and brought concerns over the health of Europe’s banking system.
The tumult eased Friday when Banco Espirito Santo officials said their reserve capital went well beyond what regulators required and was twice the size of its potentially risky exposure. Still, its stock dropped 5.5 percent Friday after its 17 percent dive before trading was halted Thursday.
The bank scare was a reminder to investors how quickly bad news can spread in the eurozone. At a time when the European Central Bank is scrutinizing banks, the problems at Espirito Santo are raising fears that there also may be unpleasant surprises in banking systems in Greece, Spain and Italy.
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“The credit crisis in the eurozone hasn’t gone away,” said Jack Ablin, chief investment officer at BMO Private Bank. “I hope this fires a shot across the bows of all central banks that says you can’t be complacent here.”
Portugal is one of the smaller eurozone economies and, like Greece and Ireland, needed an international rescue in 2011 during the continent’s debt crisis. A three-year economic recovery program was supposed to straighten out its finances. Difficulties at Banco Espirito Santo have triggered fears there may still be some unexploded bombs.
The International Monetary Fund, which provided funds for the Portuguese bailout, acknowledged in a statement that “pockets of vulnerability remain” in Portugal but declined to comment specifically on the case.
Part of what is spooking investors is that the size of the problem remains unclear and there is potential for the trouble to spread to other companies.
An audit in May found “serious” accounting irregularities at Espirito Santo International, which this week reportedly delayed a short-term debt payment to clients. Because Espirito Santo International has important stakes in a network of the group’s companies, its financial trouble could weigh on the others.
One of the subsidiaries, Espirito Santo Financial Group SA, is the major shareholder in Banco Espirito Santo and was downgraded Wednesday by Moody’s by three notches. The ratings agency expressed concern about “the lack of transparency” and the extent of links between the group’s companies.
The Portuguese government insists Banco Espirito Santo is solid and the drop in its stock prices merely reflects trouble at the parent company.
But investors have heard such reassurances in Europe before, only for banks to go bust and require the sort of huge rescue loans that can bankrupt small countries like Portugal.
Analysts say that without more information about the size of the financial problem in the Espirito Santo group, investors became cautious.
The New York Times and The Associated Press contributed to this report.