PORTUGAL'S BANKING CRISIS ISN'T SO MUCH A BANKING CRISIS AS A CORPORATE ONE

The suspension of the shares of Banco Espirito Santo could be seen as evidence of deep seated problems in the Portuguese banking system. The sell off in local stock markets and the jitters on Wall Street tell us that  this is the way that some are seeing it. However, as one who is actually here in Portugal at present I would suggest that this is not about the banking system per se, but about the corporate structure within which one particular bank sits.

One indication is that it’s not just the bank itself that has had its share suspended, it’s the higher holding company as well, Espirito Santo Financial Group. While that group is the largest shareholder in the bank it has many other interests as well. And it doesn’t stop there either, the reports are really at the level of the entire holding company, ESI or Espirito Santo International.

My colleague Raoul Ruparel has an excellent piece here describing the detailed problems of the group structure and its financing woes. Ruparel is with me on this one, this is about not the bank itself but about the group within which the bank sits.

We also have the Wall Street Journal making very similar points:

Espírito Santo’s woes date back to last December, when The Wall Street Journal first reported on concerns about the way the companies’ ultimate parent—a multi-industry conglomerate called Espírito Santo International SA—was raising funds and valuing certain assets.

Aware AWRE +0.75% of the potential problems, Portugal’s central bank ordered an audit into the conglomerate’s accounts. In May, Banco Espírito Santo, whose shares are listed in Lisbon, disclosed that the audit had found Espírito Santo International was in a “serious financial condition” and had uncovered accounting “irregularities.”

The problems intensified this week when Espírito Santo International delayed interest payments on some of its short-term debt securities, signaling to investors that the conglomerate is under mounting financial stress.

The worries are, as I say, at the higher group level, not that of the bank itself.

Of course, no one actually wants to see a large financial institution go down, not with the current delicate state of the banking system here in Southern Europe and one the Eurozone periphery. But there’s a very large difference between it being a bank itself going down because it becomes either insolvent or illiquid and a financial holding company failing at some level higher than the bank.

If it were the bank itself in trouble (and we have no evidence at all that it is) then we would be worried about the fragility of all other banks in the same system. For as we know under a system of fractional reserve banking a bank depends for its liquidity (and thus, eventually, its solvency) upon confidence. If one bank goes down because of that bank becoming either, insolvent or illiquid, then we’re back to the dark days of Lehman Brothers and Northern Rock failing, calling the entire banking system’s survival into question.

However, if the problems are at some higher level in the group, perhaps in the financing or real estate holdings (or anywhere else for that matter) not of the bank itself, but of that holding company, then we needn’t be quite so jittery. The bank deposits will be protected (up to 80,000 euros here in the eurozone) and it would be beyond belief that the Portuguese Central Bank (or the ECB) would not provide unlimited liquidity to the bank itself.

That the Espirito Santo family and their holding company might have some problems is not a reflection upon the strength or otherwise of the Portuguese or even Eurozone banking system.

Thankfully of course, for we could all rather do without that all happening again. So far at least this doesn’t look anything like a systemic crisis, only a specific one concerning the holding company.