Banco Espirito Santo renews European bank debt fears

European markets were rattled Thursday after accounting irregularities at one of Portugal's largest banks reignited fears of bank failures across the continent.

Shares in Banco Espirito Santo were halted on the Euronextstock exchange on Thursday after losing more than 16 per cent the previous trading day. In the past month, shares in BES have lost 54 per cent of their value.

There are "rising concerns over the banking sector, with particularly fears over BancoEspiritoSanto after a missed coupon payment," Scotiabank said in a note. "Markets are pricing in a building concern."

"Today's news did reignite some of those contagion fears," said Ryan Larson, head of equity trading for RBC Global Asset Management.

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The Stoxx 50 index of leading European shares was down 1.4 per cent. In Europe, Germany's DAX closed down 1.5 per cent at 9,659.13 while the CAC-40 in France fell 1.3 per cent to 4,301.26. The FTSE 100 index of leading British shares ended 0.7 per cent lower at 6,672.37.

North American markets including the TSX were also lower, but there the catalyst was slumping oil prices. The North American oil benchmark, known as WTI, has declined for the ninth day in a row the longest slump since 2009.

Bank worries

In May, Portugal's central bank audited the company and found"serious" accounting irregularities at Luxembourg-basedEspiritoSantoInternational, an unlisted holding company with ties to the bank. (Technically ESI owns almost 50 per cent of a company calledEspirito Santo Financial Group, which in turn owns about a quarter ofBanco Espirito Santo, among other holdings.)

The parent companyis "in a race against time to prevent collapse, since the discovery of ... serious accounting irregularities," Japanese investment bank Nomura said in a note to clients Thursday.

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Last week, ESIraised concerns by delaying payments on some of its short-term debt. That sparked fears about bad assets hidden in the murky company's other holdings.

The bank itself is part of a Portuguese banking dynasty dating back to the 19th century, and ESI is the bank's largest shareholder with around 25 per cent. Other major shareholders include France's Crdit Agricole, Brazil's Banco Bradesco and Portugal Telecom.

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Investors fear the holding company's financial problems could contaminate other parts of theEspiritoSantogroup by exposing hidden loans between various armsincluding the bank itself, as well asRioforte, the group's non-financial holding company, which manages assets in tourism and private health care,among other interests.

The banking arm doesn't have branches in Canada, but it does have "representative offices"where customers can do certain banking transactions. A requestfor comment from one of thoserepresentative offices for whether Canadian operations are affected wasnot immediately returned.

Portugal needed a bailout worth80billioneuros ($116billion Canadian) from the IMF and EU in 2011, loans it only recently paid off.