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Bank of Portugal’s Bail-In Novo Banco SA Made Debt Riskier

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Jan. 6 2016, Updated 10:24 a.m. ET

European banks’ issued debt just got riskier

Buying bonds issued by European (VGK) banks just got riskier. On December 30, the Bank of Portugal took a step towards fixing its banking industry. The bank reassigned five of Novo Banco’s senior bonds to Banco Espirito Santo (BKESY). The move shook investors’ confidence in Portuguese debt.

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Portuguese debt spread heightened

The spread between Portugal’s ten-year bond yield and the benchmark German bund, a ten-year bond yield, heightened. It was 1.9% on December 29, 2015. It rose 2% as of January 5, 2016. The perceived riskiness attached to Portuguese debt increased. The SPDR Barclays International Treasury Bond ETF (BWX) fell ~1% over the past five days due to fears of the contagion effect of such an event on other debt-laden European banks. Spain’s Banco Santander (SAN) and Banco Bilbao Vizcaya Argentaria (BBVA) fell by 6.3% and 4.5%, respectively, over the past five days.

Stock markets face jitters

The stock markets in Portugal haven’t experienced smooth sailing over the past week either. The Portuguese equity tracking Global X FTSE Portugal 20 ETF (PGAL) fell ~9.4% over the past ten days from December 25, 2015, to January 5, 2016. Brazil’s Banco Bradesco (BBD) and France’s Credit Agricole (CRARY) are among the largest lenders to Banco Espirito Santo. Their prices also fell. Banco Bradesco fell by 7%. Credit Agricole fell by 3.5% over the past five days.

Novo Banco SA was originated in 2014. We’ll discuss this in the next part to gain a better perspective of the situation.

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