While Japan is hit by Neoguri storm, the Eurozone's biggest nightmare came back when Portugal's biggest banked payments on some short-term debt securities. The alarm stirred financial market, dropped leading stock indices worlwide, and evoked worries over Eurozone peripheries. People are reminded of the 2011 European Debt Crisis.

While Japan is hit by Neoguri storm, the Eurozone's biggest nightmare came back when Portugal's biggest banked payments on some short-term debt securities. The alarm stirred financial market, dropped leading stock indices worlwide, and evoked worries over Eurozone peripheries.

What Happened In Portugal

Portuguese conglomerate Espirito Santo International SA (ESI) missed payment on some of their short-term debts and some of their investors are asked to swap their debt securities for shares instead on Wednesday (9/7). On Thursday (10/7), Portugal's Economico newscaster is said to have reported that ESI is seeking court protection against its creditors.

Banco
The news triggered panic on the market. The incident pushed down share prices of ESI's financial subsidiaries, Portugal's financial sector, as well as Portugal's PSI 20 index. Market in Eurozone and UK, including Euro Stoxx, Euro Stoxx Banks Index, Spain's IBEX 35, Italy's FTSE MIB, Germany's DAX 30, France's CAC 40, and UK's FTSE 100, are dropping like flies. Even US stocks ended lower yesterday after receiving considerable impact. The Eurozone peripheral countries' sovereign bond yields too, skyrocketed.

The panic could be temporary, but it is not baseless. CNBC mentioned that there are concerns about whether Banco Espirito Santo, one of ESI's banks, is going to default on its debt. Furthermore, people are still remembering the 2011 European Debt Crisis and worried that it could prove to be a systemic risk. Thomas Roth from Mitsubishi UFJ Securities quoted by Wall Street Journal said, There is worry about contagion. The theory is that it could lead to bank failures and throw us back into recession.


2011Map of 2011 European Debt Crisis: The crossed-off countries are the ill ones


Analysts have drawn some conclusion from there onward. Some says the stock market has run too high and now looking for ways to go down. While other says that it will only be having further consequences if it is proven to be contagious. But the main concern in the market now is based on two reason. The first is on European banking vulnerability, and the second is on European sovereign bonds prices.

European Banking Remains Vulnerable

The stress test done by the European Central Bank (ECB) on its banking system has been hoped to bring about a stronger health. However, the test that was done on more than 120 large banks in the area apparently failed to fulfill that hope. The failing financial of Banco Espirito Santo SA is one evidence that European banking health remains shaky. The Wall Street Journal reported that an audit in May ordered by Bank of Portugal on the bank revealed Banco Espirito Santo's serious financial condition and some accounting irregularities.

The case might be just that one bank is under bad weather. However, it highlights the vulnerability in European banking that frightened the market. Furthermore, the vulnerability has warranted a warning from the IMF as it said pockets of vulnerability is still exist in Portugal's financial system.

European Sovereign Bond Illusion Of Wellness

Another problem emerged from Eurozone peripheral countries sovereign bond. Bond yields have dropped significantly compared to when the 2011 Debt Crisis occur. Even Greek sovereign bond is managed to be sold at considerable success. However, all is not as well as it seemed. Jim Iuorio from TJM Institutional Services quoted by CNBC said, There probably is some kind of bubble in the European (bond) peripherals, and when that bubble busts it could have a destabilizing effect. But he inferred that it might not turn into a  big deal unless French sovereign bond started to sell.

As the Portugal Bank's news is related to the company's bond, it triggered European peripheral countries' bond selloff. The problem is, if the bank is unable to fulfill its obligation, then it will need to be bailed out. Meanwhile, Portugal and other Eurozone peripherals are short on cash now, just as they were during the 2011 crisis. That is why investors are worried. Nevertheless, the latest reports from Bloomberg insinuated that the selloff might be limited. The event has increased market uncertainty, but it is not expected to have greater influence.


In short, we might wish for market drops to end shortly. The uncertainty that sparked by one bank's turmoil should end once a solution is found. Still, the vulnerabilities revealed by this event will not go away so easily. It remains to be seen whether this alarm will be heeded by the people of whom it may concerns, or if another crisis is on the horizon.