So that’s what happened at Banco Espirito Santo

That the top holding company of the Espirito Santo family was in trouble was known. But why should this be a problem for a bank that was two layers down and only minority owned anyway?

Portugal’s Banco Espirito Santo lost €3.6bn (£2.85bn) in the first half of the year – mostly on loans to its founding family’s crumbling business empire – and now has less capital than it is required to hold.

The loss at the country’s largest listed bank wiped out its €2.1bn capital buffer, and is likely to force the bank to resort to a new capital increase to preserve solvency ratios demanded by regulators.

The loss includes €4.25bn euros in impairments and contingency measures, BES said. The biggest item was a provision of €1.2bn on loans to the Espirito Santo Group – the bank said €856m-worth of those provisions were taken because the bank’s directors learned that BES had granted two letters in favour of creditors of the family group, which were not approved in accordance with internal procedures.

Ah, they were, perhaps unknowingly, guaranteeing the debts of that holding company two levels up. I suspect there’s going to be a very interesting story about how they managed to cock up. And of course this also shows that Piketty isn’t quite right in his wealth always increases prediction. One of Portugal’s richest families has just gone bust after a century. What you invest in is rather important: perhaps more so than merely having capital to invest.

5 comments on “So that’s what happened at Banco Espirito Santo

  1. I’m not sure that being an unsuccessful beneficiary of tax dodging is hoi polloi-ish enough.

  2. Re: Stemcore… I don’t see any difference between what they’ve just done and an out-of-work single mother “consolidating her debts” with Wonga or the like.

    Only difference seems to be that if it’s for a few hundred quid you’re a feckless loser but if it’s for a billion you suddenly become an “Industry Leader”.. 🙂

  3. You should have read my Forbes and Pieria posts on this, Tim.

    From my Forbes post, over two weeks ago;

    “….the strange financing arrangements noted by Ruparel mean that the conglomerate may be able to drain the bank’s capital to meet its own obligations.”

    That is exactly what has just happened, and why the bank is now in regulatory insolvency – and why there may be further losses to come.

    The Espirito Santo family has been draining its bank to fund other business interests for years. And they were doing this in a way that was deliberately designed to escape the regulators’ eye. Opaque and complex structures such as that in the Espirito Santo Group exist for one purpose only, and that is to hide what is really going on. Eventually we will find that what was really going on was fraud (well, we know that already, actually, but it hasn’t been proved yet). But by that time, the whole house of cards will have collapsed.

    Forbes post is here: http://www.forbes.com/sites/francescoppola/2014/07/11/banco-espirito-santo-a-portuguese-disaster-not-a-european-crisis/

    Pieria post is here:
    http://www.pieria.co.uk/articles/espirito_santo_complexity_opacity_and_moral_hazard

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