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 stabilize 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.
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 stabilize the debt and then whittle down the ratios. Any economic relapse would push Portugal towards a compound debt spiral. 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.
Source: The Telegraph
Comments:
The bankruptcy of the U.S. Investment Bank Lehman Brothers in 2008, triggered a domino effect culminating in the biggest recession in the world economy over the past 70 years. Today, analysts fear that the bankruptcy of the Portuguese Banco Espirito Santo will bankrupt other European banks and, perhaps, lead to the new global recession.
Why does the bankruptcy of one company trigger a domino effect? Because investors start panicking, and they withdraw their money from banks, sell equities and bonds. But how could the panic among investors lead to the mass bankruptcy and the world recession? Because the banks’ assets, stocks of large companies do not have a corresponding provision in the real sector of the economy. Their financial assets are bubbles, Ponzi schemes. The value of these financial assets grows, as long as the investors trust them, and falls down when the investors doubt them.