* Stocks fall, bond yields rise on concerns over bank
* Regulator halts trading in BES
* Portuguese troubles rattle European markets
(Adds Breakingviews link)
By Daniel Alvarenga and Axel Bugge
LISBON, July 10 European and U.S. stock markets
fell, and bond yields of Europe's southern nations rose on
Thursday as investor fears over financial troubles at the
family-owned holding companies behind Portugal's largest listed
bank spilled across markets and borders.
Portugal's stock market regulator halted trading in Banco
Espirito Santo after the shares fell 19 percent.
The sell-off followed a decision by Espirito Santo Financial
Group (ESFG), which owns 25 percent of the Portuguese
bank, to suspend trading in its shares and bonds due to
"material difficulties" at its own largest shareholder, Espirito
Santo International (ESI), which is controlled by one of
Portugal's most important business clans, the Espirito Santos.
The market regulator said it would ban short-selling in BES
stock on Friday.
ESFG, a conglomerate that also owns an insurance company and
a Swiss bank, said it was halting trading while it assessed the
impact of its exposure to ESI.
The movements in Portugal, which only recently exited an
international bailout started at the height of the euro zone
debt crisis in 2011, rattled investors continent-wide, and stock
U.S. stocks also fell, joining the European sell-off driven
by troubles at the Portuguese bank.
Market volatility prompted Spain's Banco Popular to
call off a 750-million-euro bond issue, and construction firm
ACS also withdrew a planned issue. Shares in small
Spanish lender Liberbank, which said it had a 0.93 stake in
Espirito Santo Financial Group, fell almost 10 percent earlier
on Thursday, ending the day down 2 percent. Greece managed to
place just half of a planned 3 billion euro bond
Even with Thursday's jump in Portuguese yields -
10-year-bonds rose above 4 percent - the levels are however a
far cry from the height of the debt crisis when they reached 17
percent. And Spain still managed to successfully get an
inflation-linked bond away.
The Bank of Portugal said on Thursday the "solvency
situation of BES is solid," and that the central bank had taken
steps to ensure there is no contagion from Espirito Santo
companies on the bank.
Portugal's government still has 6 billion euros in funding
available to rescue its banking sector.
Still, Thursday's contagion across borders and markets is a
vivid reminder of the crippling debt and economic crisis from
which Portugal and other countries on Europe's southern rim are
only just emerging.
"This Espirito Santo case has been simmering for some time,
but is clearly now bursting out into the open and is obviously a
troubling development for a country that has just exited its
bailout programme," said Nicholas Spiro, head of Spiro Sovereign
Strategy in London.
At the root of investor jitters are concerns over the full
extent to which both BES, the Portuguese lender, and ESFG, the
holding company above it, are exposed to any problems at ESI.
The two holding companies are controlled by the Espirito Santo
family, which is one of Europe's biggest banking dynasties and
which founded BES in 1869.
In May, auditors found what they called "material
irregularities" at ESI, a Luxemburg-registered holding company.
BES has said that these irregularities represent a reputational
risk for the bank. That's partly because BES has sold debt
issued by ESI, and there were fears that ESI would fail to
reimburse at least some of its debt holders on time.
BES has said that it has 980 million euros of exposure to
Espirito Santo holding companies, and ESFG has
booked 700 million euros in provisions for ESI debt.
As the family and its respective holding companies struggle
to repay their debts, they are considering debt-for-equity swaps
and may ask for more time to reimburse, according to people
familiar with the situation. The family is also working on a
restructuring plan for its holdings.
"This is increasingly becoming a situation that ESI and ESFG
and maybe even BES cannot control," said Tom Jenkins, a
London-based credit analyst at Jefferies.
John Raymond, senior European Banks Analyst at Credit
Insights, told a conference call "there could potentially be
little or no value in those companies," referring to ESI and
another Espirito Santo holding company, Rioforte.
BES shares are now less than half their value of a month ago
and well below the 0.65 euro price that investors paid in a
capital increase last month. BES would not comment on the slide
in its shares. A spokeswoman at the CMVM market regulator said
trade in BES was suspended, pending a statement by the bank.
The troubles for the Espirito Santo family have been
exacerbated by lack of information about the family's holding
companies - ESI and Rioforte. The uncertainty centres on exactly
how much exposure BES has to the holding companies.
Joao Lampreia, an analyst at Banco Big, said BES was falling
because the probability of a restructuring of debt at holding
companies was growing.
"We are talking about a direct and indirect exposure (by BES
to family holding companies) of 3.5 billion euros, in other
words BES' market cap," Lampreia said.
ESFG recently said its exposure to ESI and Rioforte rose to
2.35 billion euros at the end of last month from 1.37 billion at
the end of 2013.
Luxembourg authorities said last month they had launched an
investigation into ESI over alleged breaches of company law.
(Additional reporting by Andrei Khalip, Filipa Cunha Lima and
Sergio Goncalves in Lisbon and Laura Noonan in London; Writing
by Axel Bugge; Editing by Sophie Walker, Alessandra Galloni and