The Portugal banking system is on a roller-coaster ride. Investors were first unnerved in mid-July when Espirito Santo International, the largest shareholder in Banco Espirito Santo (“BES”) – one of the biggest banks in Portugal – stalled its shares and bonds trading as its parent company Espirito Santo International (ESI) allegedly defaulted on a debt payment and was accused of accounting discrepancies.
Just as investors started to settle down, a new concern came in the form of €3.6 billion of first-half loss posted by BES, suggesting main shareholder’s financial crisis. The numbers came as a shocker as the Bank of Portugal was anticipating around €2 billion of loss. Not only this, a flurry of creditor-protection filings by the concerned units has been going on since the ESI issue.
Per financial times, the on-hand capital cushion was insufficient to make up for the record loss and BES shares plunged 10.6% on July 30, touching an all-time low of €0.347. Also, global equity markets appeared too fragile to absorb the shock. In fact, Portugal banking crisis raised concerns for the overall European space with almost every ETF losing notably last week.
Though Portugal’s central bank promptly came forward to save the beleaguered bank and announced a 4.9 billion-euro ($6.6 billion) bailout, it will only serve the depositors and senior bondholders, as per sources. Junior bondholders and present stockholders will be left with losses (read: Portugal ETF: Canary in the Coal Mine for Europe Investing?).
Initially, the financial shakiness in one of the major banks of Portugal has raised fears over European investing last week. Banco Espirito Santo shares plummeted about 67% last month. The core Portugal ETF Global X FTSE Portugal 20 ETF (PGAL) has shed more than 8% in the last three days (as of August 1, 2014). The malaise spread to the entire continent with the biggest European ETF FTSE Europe ETF (VGK) losing about 3.5% last week.
However, the bailout announcement lent a helping hand to the stock market. The day after Portugal announced the bailout relief, PGAL added more than 1% on August 4. Euro zone financials were up more than 1% while the victims – Portuguese banks –added 6%, though BES shares are still shelved. Germany, France and U.K. witnessed marginal progress in their key indices. As of August 4, VGK had gained more than 0.6%.
Is the Crisis That Scary?
Per Wall Street Journal, Portugal is saving Banco Espírito Santo through a €4.4 billion capital insertion. The program is part of the credit line agreed on in 2011 bailout scheme. There are some more funding routes still available (read: Protect Your Portfolio with These Multi-Asset Income ETFs).
The European Union and the International Monetary Fund let Portugal borrow €78 billion under the three-year program that was over in May. The journal noted that a share of that loan – €12 billion – was kept back to help banks in need.
So, an intense financial crisis seems less likely to evolve in the near term. But if the crisis deepens going forward, Portugal might be in serious trouble . Though the nation is striving to return to full health, its bank-resolution fund is more or less vacant indicating that the nation might not bear such issues frequently.
All in all, the central bank of Portugal has perhaps saved Banco Espirito Santo this time; the issue seems to be a reality check for the entire European economy or rather for all developed nations. Only a few years back, the world saw Lehman Brothers crashing and a severe Euro zone debt crisis; and is still bearing the brunt of it.
So investors need to be watchful while considering Europe investing. Notably, some quality ETFs likes SPDR MSCI United Kingdom Quality Mix ETF (QGBR) and SPDR MSCI Germany Quality Mix ETF (QDEU) and some U.K.-based ETFs like MSCI United Kingdom Hedged Equity Fund (DBUK) and WisdomTree United Kingdom Hedged Equity Fund (DXPS) were less ruffled last week and lost marginally. QGBR in fact added gains (read: Negative Interest Rates Put These European ETFs in Focus).
Amid such a situation, we suggest investors to cherry pick some top-ranked Europe ETFs to sail through the wavering market condition. DBUK currently has a Zacks ETF Rank of 2 or Buy rating. Apart from DBUK, First Trust United Kingdom AlphaDEX (FKU), iShares MSCI United Kingdom (EWU) and iShares MSCI Germany (EWG) are some examples of top-ranked European ETFs (see all European ETFs).
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