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BES crisis should have been an opportunity

Spain wins

Banco Espirito Santo offered a welcome chance to re-evaluate a proposition that nobody really believed anyway. The market didn't take it.

When Portuguese Banco Espirito Santo’s owner, Espirito Santo Financial Group brought about a panic about the country’s banks at the end of last week, it could have been the time to re-think the optimistic, borderline lunatic valuations that have been bestowed on peripheral banks. 

It wasn’t a crisis that surprised anyone, and to many it seemed welcome. “This is how Portuguese banks work,” said one banker in the depths of turmoil that even then was expected to pass.

Except Portuguese and other peripheral European banks are not being priced that way. Southern Europe has long been valued for seamless recovery — with little consideration for the various explosive troubles that have been tucked away as they smarten up to catch the best of changing investor sentiment and a hunt for high-yielding stocks.

True, there have been few defaults or bankruptcies. Europe has struggled through what should be the worst of the crises with few casualties. But problems have been patched up, not fixed, in many cases.

Unwavering positive sentiment towards the periphery means a huge amount of European investment funds — and therefore the savings of European citizens — is tied up in the continued safety and recovery of peripheral banks. 

More than €11bn of new equity capital has found a home in Italian banks alone ahead of ECB’s asset quality review, despite the €75bn of non-performing loans (the ones we know about) in the system.

Most people know this is troubling — there was the thrill of anticipation in the air last week, along with the hope that the market as a whole might recognise what most individuals in it have long believed. 

Long-term, the market will be more resilient once weak longs, herd-followers and assorted hangers-on are no longer buoying up valuations. It is a healthier world where investors actually want a stock (or a Coco, or senior) at the price offered, rather than buying anyway to match benchmark and nervously looking over their shoulders. 

But the opportunity for a shakeout passed. The market wobbled, and went back to yield-chasing. Investors would look silly passing up stocks that have rallied like never before; capital markets bankers would be sacked for discouraging deals that both issuers and investors want to happen.

Crises are a good time for a clear out. But having struggled through the worst one in recent history, perhaps we’re not ready to confront what we have packed away in those damp boxes. Beware: the longer it sits there, the mouldier it gets.

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