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Espirito Santo group plunges into risk of default


Portuguese banking group Banco Espirito Santo, threatened by a financial crisis affecting its main shareholder, came under more pressure Thursday from a risk of default and two credit downgrades.

Moody's credit rating agency downgraded the notation of a key holding company in the group to within one notch of default status, the day after a downgrade by SandP for the bank itself.

This latest two-notch downgrade of Espirito Santo Financial Group (ESFG) "reflects the heightened risk of default for the group, combined with the potential for significant losses or bondholders," Moody's said.

Shares in Banco Espirito Santo (BES), which had rallied sharply from a record low on Wednesday, plunged again, fueling concern that if the group's crisis worsens it could affect the Portuguese financial system in general.

The latest downgrade was from "Caa2" to "Ca".

Strains within the group had led Moody's to downgrade the operating bank Banco Espirito Santo (BES) to "B3" from "Ba3" last week.

Late on Wednesday, Standard and Poor's downgraded the bank's long-term debt to "B-", deep into "junk" status with a negative outlook, following a one-notch cut on Friday.

The crisis surrounding the bank arises from a hole in the accounts of one of its main shareholders, Espirito Santo International (ESI) and allegations that it covered up accounting problems. ESI is one of a chain of holding companies in the banking group.

Another holding company, Rioforte, failed to meet repayment of a debt of 847 million euros ($1.146 billion) to creditor Portugal Telecom on Tuesday.

On Thursday another debt to PT of 50 million euros falls due as well.

PT has warned that it will take legal action against Rioforte and the banking group to obtain repayment, but Rioforte is expected to seek protection from creditors while it refinances its balance sheet.

Rioforte, which is based in Luxembourg, is expected to put forward a plan to restructure its balance sheet to the commercial court there with the aim of selling assets and raising funds while being sheltered from creditors.

- High financial exposure -

Rioforte owns 49 percent of Espirito Santo Financial Group (ESFG) which in turn is the main shareholder in BES with 20.1 percent alongside French bank Credit Agricole which has 14.6 percent.

Moody's said on Thursday that the risk for the group "is reflected by ESFG's high direct exposure to ESI and Rioforte, that amounted to 2.35 billion euros at end June 2014."

The Portuguese central bank has said that shareholders would likely provide new funds for the group.

On Wednesday, shares in Banco Espirito Santo (BES) had jumped 19.74 percent to 0.45 euros, but that was before the two downgrades.

In afternoon trading on Thursday, they were down by 10.99 percent to 0.40 euros.

The declines pushed the overall Portuguese stock market down by 1.44 percent.

Another negative factor for BES shares was the expiry late on Wednesday of a ban on the short-selling of the stock, meaning that traders may now sell BES shares which they do not yet own in the belief that the price will fall further before the contract has to be honoured.

Portugal Telecom has suffered a second setback from the non-payment, since it had to renegotiate on Wednesday a tie-up agreement with Brazilian telecom operator Oi.

Under the new terms, PT will take on responsibility for the unpaid debt, which was to have been shouldered by Oi, and its share in the new entity will fall from 38.0 percent to 25.6 percent.

Shares in PT also fell back on Thursday, shedding 5.13 percent to 1.79 euros, after rallying 3.28 percent to 1.89 euros on Wednesday.

PT shares have fallen by about 35 percent since the existence of the loan to Rioforte came to light on June 26.