We've been discussing the situation around Banco Espirito Santo
and to me there seems to be so many intricate links a bit like an octopus
the legs of the parent company seem to reach out in many different directions
perhaps you can explain it from your point of view?
I'll give it a go
it is quite a messy organization we have to holding companies in Luxembourg which
are
the Espirito Santa international then the Rioforte
and these then own the holding company's in Portugal
Espirito Santo Financial Group and then that owns the bank so it's a very
multi-layered system
and the confusing part is we don't really know how exposed each part is to the
other part a system
Espirito Santo bank has said "we have at least a billion euros in exposure to
the parent groups but we also helped sell
maybe one and a half billion euros worth of debt to our retail and institutional clients
which now might be written down" so you know, they could be liable for lawsuits on
that
and we also know that this has been going on for a year and these sort of
exposures have been trickling out
and now as an investor you have to wonder what else is still in there
do you know the full story and I think that's why it's been so painful today
If you look at the particular company Banco Espirito Santo, the listed company
you can see that this stretches to the share ownership to Luxembourg
France, United States, UK, some the biggest exposures there, so it tells you
who's holding the actual stock but if you look at the numbers
the actual risk that the bank has said that they have exposed
and they're putting a number on it roughly about a billion euros so far but
Citigroup has crunched it and they think the exposure risk could be well and truly over
four billion euros what type of position
does that put BES in?
Well, I think it puts it in quite a poor position, I mean, the four
billion would wipe out its capital buffer
and it would have to go back and raise that essentially again ahead of the AQR
and the stress tests and that's something it can't do on the markets
so that would require public intervention
I think, one thing that is also becoming clear is now actually for all the talk of the
Eurozone structures, the Baylin,
the SRM, the Single Resolution Mechanism, and the rules for basically
winding up in dealing with bank
failures or issues none of that's enforced yet so no one knows actually how
this is going to happen
so they're starting to realize, "okay, well actually we're investors
and if a problem happens now, ahead of next year, we know who's gonna deal with
it, how's it going to be handled?" and there's so much uncertainty around that I think
investors are starting to realize that
The buck stops now probably with the
state national government and it's a bit like a Monte dei Paschi situation, there's going
to be an argy-bargy of how much the state wants to put in, what they get in return,
this is not a small bank like Monte dei Paschi
Italian wise, it's the largest bank in Portugal, and Portugal's a small country
its got a fiscal austerity program it's not going to be easy?
Very much so, and I think this whole idea of the Sovereign Banking loop
being broken or starting to being broken, it clearly hasn't yet
you know, the buck stops, as you said with Portugal. It doesn't have the money
really to inject
four or five billion straight into the bank and it's not clear whether the bailout
fund is yet willing to the direct recapitalization of banks
the rules around that are hazy
it was waiting until after the AQR but you know
these are real problems now
and if the losses start coming out and amounting then you've got a real
situation on your hands
If you look at the major shareholders to Banco Espirito Santo
you can see that it is this holding company from the founding family so
they have difficulty presumably
there's no extra money that they can tap
Credit Agricole has been trying to
lessen some of it's risk exposure so
you have to assume that they haven't got the cash either and leaves you with the
next three investors,
Blackrock, well, deep pocket's there
Silchester, question marks,
Bradesco
this is the Brazilian investment group, so perhaps they do have a little bit of cash
but you got to think that there are question marks about filling
that very wide gap
What about the ongoing reputational issues here
because you mentioned
the debt that was sold to retail investors of the bank as well so
obviously it feels as though
that could be an issue along with what happens on the deposit side
for the lending, any other operations and business
How damaging can that be to the trading performance of the bank short term?
Yeah I think it can be very damaging and I think they haven't really set aside
much or any way in the mechanisms that deal with lawsuits
of this level and, you know, deal with both reputational risk and the monetary risk
you know it really could have a big hit on the short term and it will have a
broader hit reminding people that you know
this overhang of banking actions that have taken place over the past
five years, you know, it's still there, it hasn't been dealt with and these sorts of
problems are still stored up in many periphery banks which
I think as Bob mentioned earlier have these old and opaque structures
which people haven't really spent enough time looking at in the past
year, year and a half,
in the run-up to the AQR and they're being reminded that actually there's a
lot of, may be, hidden risk out there that people should still pay attention to