By Daniel Alvarenga and Axel Bugge
LISBON (Reuters) - European and U.S. stock markets fell, and bond yields of Europe's southern nations rose on Thursday as investor fears over financial troubles at the family-owned holding companies behind Portugal’s largest listed bank spilled across markets and borders.
Portugal’s stock market regulator halted trading in Banco Espirito Santo after the shares fell 19 percent.
The sell-off followed a decision by Espirito Santo Financial Group (ESFG), which owns 25 percent of the Portuguese bank, to suspend trading in its shares and bonds due to "material difficulties" at its own largest shareholder, Espirito Santo International (ESI), which is controlled by one of Portugal's most important business clans, the Espirito Santos.
The market regulator said it would ban short-selling in BES stock on Friday.
ESFG, a conglomerate that also owns an insurance company and a Swiss bank, said it was halting trading while it assessed the impact of its exposure to ESI.
The movements in Portugal, which only recently exited an international bailout started at the height of the euro zone debt crisis in 2011, rattled investors continent-wide, and stock markets plunged.
U.S. stocks also fell, joining the European sell-off driven by troubles at the Portuguese bank.
Market volatility prompted Spain’s Banco Popular to call off a 750-million-euro bond issue, and construction firm ACS also withdrew a planned issue. Shares in small Spanish lender Liberbank, which said it had a 0.93 stake in Espirito Santo Financial Group, fell almost 10 percent earlier on Thursday, ending the day down 2 percent. Greece managed to place just half of a planned 3 billion euro bond placement.
Even with Thursday’s jump in Portuguese yields – 10-year-bonds rose above 4 percent - the levels are however a far cry from the height of the debt crisis when they reached 17 percent. And Spain still managed to successfully get an inflation-linked bond away.
The Bank of Portugal said on Thursday the "solvency situation of BES is solid," and that the central bank had taken steps to ensure there is no contagion from Espirito Santo companies on the bank.
Portugal's government still has 6 billion euros in funding available to rescue its banking sector.
Still, Thursday’s contagion across borders and markets is a vivid reminder of the crippling debt and economic crisis from which Portugal and other countries on Europe’s southern rim are only just emerging.
"This Espirito Santo case has been simmering for some time, but is clearly now bursting out into the open and is obviously a troubling development for a country that has just exited its bailout program," said Nicholas Spiro, head of Spiro Sovereign Strategy in London.
At the root of investor jitters are concerns over the full extent to which both BES, the Portuguese lender, and ESFG, the holding company above it, are exposed to any problems at ESI. The two holding companies are controlled by the Espirito Santo family, which is one of Europe’s biggest banking dynasties and which founded BES in 1869.
In May, auditors found what they called “material irregularities” at ESI, a Luxemburg-registered holding company. BES has said that these irregularities represent a reputational risk for the bank. That’s partly because BES has sold debt issued by ESI, and there were fears that ESI would fail to reimburse at least some of its debt holders on time.
BES has said that it has 980 million euros of exposure to Espirito Santo holding companies, and ESFG has booked 700 million euros in provisions for ESI debt.
As the family and its respective holding companies struggle to repay their debts, they are considering debt-for-equity swaps and may ask for more time to reimburse, according to people familiar with the situation. The family is also working on a restructuring plan for its holdings.
"This is increasingly becoming a situation that ESI and ESFG and maybe even BES cannot control," said Tom Jenkins, a London-based credit analyst at Jefferies.
John Raymond, senior European Banks Analyst at Credit Insights, told a conference call "there could potentially be little or no value in those companies," referring to ESI and another Espirito Santo holding company, Rioforte.
BES shares are now less than half their value of a month ago and well below the 0.65 euro price that investors paid in a capital increase last month. BES would not comment on the slide in its shares. A spokeswoman at the CMVM market regulator said trade in BES was suspended, pending a statement by the bank.
The troubles for the Espirito Santo family have been exacerbated by lack of information about the family's holding companies - ESI and Rioforte. The uncertainty centers on exactly how much exposure BES has to the holding companies.
Joao Lampreia, an analyst at Banco Big, said BES was falling because the probability of a restructuring of debt at holding companies was growing.
"We are talking about a direct and indirect exposure (by BES to family holding companies) of 3.5 billion euros, in other words BES' market cap," Lampreia said.
ESFG recently said its exposure to ESI and Rioforte rose to 2.35 billion euros at the end of last month from 1.37 billion at the end of 2013.
Luxembourg authorities said last month they had launched an investigation into ESI over alleged breaches of company law.
(Additional reporting by Andrei Khalip, Filipa Cunha Lima and Sergio Goncalves in Lisbon and Laura Noonan in London; Writing by Axel Bugge; Editing by Sophie Walker, Alessandra Galloni and Giles Elgood)