Portugal Telecom has become the latest firm to be caught up in the troubles surrounding Portugal's biggest listed bank Banco Espirito Santo, forcing it to revise a merger with Brazil's Oi. As Portuguese assets have had a bumpy ride in recent days. Joanna Partridge asks if investors should be bracing for the start of mini-crises in the periphery?
Banco Espirito Santo's problems spreading further. The latest victim - Portugal Telecom. It's agreed to revise terms of a merger with Brazil's Oi to reflect Telecom's lower valuation. That's after a holding company of the financially troubled Espirito Santo family failed to repay it a nearly $1 billion loan. This merger is one of the most important deals for Portugal in recent years. And it's the biggest consequence so far of the growing woes within the business empire of the Espirito Santo family. It's also caused investor jitters. Banco Espirito Santo shares and other Portuguese assets have been on a rollercoaster ride in recent days. Lisbon's bonds have also underperformed most of their euro zone peers in the past month. While some suggest fears of contagion are overdone - the BES turmoil has left some investors bracing for new mini-crises in the euro zone's indebted economies. Jeremy Stretch is from CIBC. SOUNDBITE: HEAD OF FX STRATEGY AT CIBC, JEREMY STRETCH, SAYING (English): "We would argue that obviously this particular story is not one which is endemically systemic for the euro zone, but I think it does underline an inherent problem for the euro zone and that's still the capitalisation of the banking sector. Whilst the U.S. were able to recapitalise their banks very quickly and that encouraged economic recovery, I think there is still glaring question mark about the capitalisation of a number of banks and of course we have the asset quality review across the summer which could well reveal a number of nasty and unpleasant capital shortfalls." The European Central Bank's pledge to save the euro has seen cash flood into Portugal, Spain and Italy as the debt crisis has waned. And the ECB's latest round of cheap four-year loans to banks, being paid out in September and December, is still helping demand for peripheral debt. Portugal's recovery, after emerging from its international bailout in May, is seen as being on track. And the government and central bank have repeatedly said BES is able to deal with any exposure to the troubled companies belonging to its founding family.