Banco Espirito Santo: A Portuguese Disaster, Not A European Crisis

The ratings agencies Moody’s and S&P have sharply downgraded the long-term debt ratings of the troubled Portuguese bank Banco Espirito Santo (BES). Both ratings agencies cite as the principal reasons for the downgrade the financial problems of BES’s ultimate parent, the Espirito Santo Group (ESG), and the possibility that the ring fence supposedly separating BES from its parents might prove insubstantial. Here is Moody’s explanation: The downgrade of BES’s standalone financial strength rating to E/ca from E+/b1 reflects the risks associated with the bank’s direct exposure to the Espirito Santo Group and the likelihood that it may become liable for any further obligations stemming from the group. These concerns are heightened by the lack of information on BES’s ring-fencing against these risks. S&P cites management instability within BES itself as well as its exposure to ESG: We see persistent uncertainty regarding Banco Espirito Santo’s (BES) management, reflected in further recent announcements about proposed, yet-to-be approved changes to BES’ management team.