Week in Review & Week Ahead


Continuing developments in the Espírito Santo Group crisis overshadowed the news this week. BES’s market value has almost halved since May as its exposure to Rioforte and Espírito Santo International (ESI) nearly doubled to € 2.4bn in six months. Additional concerns are due to exposure from BES Angola, where bad loans soared by 84% between 2010 and 2013 and only 70% of the € 6bn loans is covered. Additionally, several Portuguese corporations have reported a combined exposure of € 5bn in loans, including Portugal Telecom, who was forced to restructure a merge with the Brazilian telecom Oi, as well as direct loans from the banks BCP and CGD.

Overall there is substantial uncertainty about how bad the losses are and how much exposure BES has to the fallout of its parent group companies. Standard and Poor’s lowered its BES’s rating from B+ to B-, and said it was ready to reduce the rating again in the event of more fluctuations in deposits and should the exposure to the ESFG prove greater than currently expected. The government has ruled out an intervention for now, though there are still 6.5B Euros remaining in the bank solvency support fund should an intervention prove necessary. As an alternative to intervention, the governor of the central bank, Carlos Costa, guaranteed that BES shareholders are interested in a potential capital increase.

In the first sale of treasury bills since the BES crisis began, Portugal issued€ 1250mn in short-term debt (six and twelve month).The twelve-month interest rate rose to 0.453% from an average yield of 0.364% at a June auction, likely reflecting uncertainty over the overall exposure to the BES crisis. The six-month interest rate fell to 0,243%, however demand weakened from the previous issue, with the bid-to-cover ratio falling from 4.6 in March to 2.4 this week.

In the US, Janet Yellen announced that interest rates might rise earlier than expected for the second semester of 2015 if job growth continues at a rapid pace (it has been growing 230,000 jobs a month). She added that while the economy has improved, growth is still fragile as evidenced by a decline in labour force participation, signs of weak financial stability, and a levelling off of real estate activity.

IP May 2014

Industrial production grew by 0.5%yoy in the Euro area. In Portugal, production increased 0.3%yoy, down from 5.8%yoy in April.

Eurostat also released the harmonized CPI for June, which revealed Euro area annual inflation at 0.5%yoy, stable compared with May and down 1.1 percentage points from June 2013. The European Union annual inflation rose slightly to 0.7%yoy in June, from 0.6%yoy in May (1.7%yoy June 2013). Portugal (-0.2%yoy) was among those documenting a negative annual rate, with most countries recording inflation rates below 1%.

WEEK AHEAD July 21st – 25th

  • July 21 (Bank of Portugal): The Statistical Bulletin will be published with the release on the current and capital account data as for May, which may be indicative of the direction of the net exports contribution for Q2 GDP, to be released on mid-August.
  • July 22 (Eurostat) releases Q1 data on government debt for the European Union.
  • July 23 (Eurostat) releases Q1 data on government deficits, as well as a flash consumer confidence indicator for July.