Spanish Banks Tumble

Shares in Portuguese and Spanish banks fell sharply a day after Moody's Investors Service downgraded Portugal's sovereign-debt rating to junk and warned that the country may need another round of aid from the European Union.

Shares in Banco Comercial Portugues SA fell more than 5% in Lisbon morning trading, while Banco Esprito Santo SA and Banco BPI SA both were down more than 4%.

For Portugal and its banks, the downgrade implied "the materialization of the worst-case scenario of a sharp increase in cost of risk and a lack of access to markets for a longer period," said one Madrid trader.

In Madrid, the picture was almost as bleak, with five banks down more than 2%.

Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Popular Espanol SA all have Portuguese units and hold part of the country's sovereign debt.

According to the Bank for International Settlements, Spain's financial system is the most exposed to Portuguese risk, with €78.3 billion ($113 billion) in public and private debt, roughly a third of the country's total outstanding debt.

Spanish brokerage Ahorro Corp. said the exposure Spanish banks have to Portugal is "manageable" and that it already is discounted by markets.

Moody's cut Portugal's long-term government bond rating to Ba2, which is two levels into junk status, and assigned a negative outlook, meaning further downgrades are possible. Fitch Ratings and Standard & Poor's have each recently cut the country's ratings. They rate Portugal at BBB-, which is the lowest investment-grade level and the equivalent of two notches above Moody's new rating.

Portugal is in the market Wednesday trying to sell as much as €1 billion in treasury bills.

Bond spreads of all the peripheral economies in the bloc of euro-using nations moved sharply wider in the wake of the Moody's move.

The downgrade comes at a delicate time for Spain, which is in the final stages of restructuring the banking sector. In coming weeks two saving banks will try to push through initial public offerings, while the central bank's bailout fund is injecting capital into the country's weakest lenders.

A key component of Moody's decision on Portugal was the possibility that private investors will have to contribute to any new international bailout.

Current discussions about a Greek debt restructuring are revolving around bond holders accepting the rollover of debt. Moody's said if that happens, it could discourage investors from investing in Portugal's paper.

Portugal's €78 billion bailout money is scheduled to run out in 2013, and Portugal will have to tap the private sector for further financing.

Portuguese banks have been relying on European Central Bank funding for more than a year, with borrowings standing at €47.2 billion as of May.

 

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