Bank Crisis Further Rattles Portugal Economy

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Portuguese Economy Minister Antonio Pires de Lima admitted on Monday that a crisis engulfing the giant Banco Espirito Santo group could affect the country's recovery, but insisted Portugal's "upturn is stronger".

"The crisis in the Espirito Santo group will not do us good, but the recovery is stronger and it is there to stay," he told journalists.

The turmoil at Portugal's largest lender comes at a delicate time for the country, which has just come out of a joint EU-IMF rescue programme despite a surprise drop of 0.6% in its GDP in the first three months of the year.

Many analysts fear the knock-on effects of the crisis could further undermine Portugal's faltering economy, one of the weakest in the eurozone.

Portuguese President Anibal Cavaco Silva, on a visit to South Korea on Monday, said the problems affecting the non-banking part of the group "could have a certain affect on the real economy... and its creditors could be confronted with serious difficulties".

The bank is threatened by a hole in the accounts of one of its main shareholders, the Luxembourg-based Espirito Santo International (ESI), and allegations that it covered up accounting problems. ESI admitted on Friday that it could not pay its debts.

Another of the bank's holding companies, Rioforte, failed to meet repayment of a debt of 847 million euros ($1.146 billion) to Portugal Telecom last Tuesday. 

Economist Paula Carvalho, of BPI Bank, said although analysts had initially felt Portugal's troubles were transitory, "there is now a certain chilling, and doubts about the strength of the recovery in the second trimester".