After rescue of Portuguese bank, eurozone fears for future health

LISBON, Portugal - A new Portuguese bank appeared Monday, born from the ruins of a collapsed business empire, and declared on its website that it was "stronger and safer."

Investors rattled by the eurozone's latest financial drama will, however, need more reassurance.

Portugal's biggest banking scandal, which compelled authorities Sunday to put up 4.9 billion euros ($6.6 billion) to prevent the collapse of ailing Banco Espirito Santo, raised questions about how regulators were apparently hoodwinked. It will also focus minds on the European Union's yearlong health check on the banking sector, whose results are due in October.

The debt crisis that in recent years battered countries sharing the euro currency, forcing countries such as Greece, Ireland, and Portugal to request bailouts, has ebbed in recent months. Investors remain wary, though. They fear more nasty surprises could be around the corner, and the scandal surrounding Banco Espirito Santo's huge unreported debts is fueling those concerns.

Barclays analysts predicted that investors will "remain guarded about risks which could stem from latent problems in the [Portuguese] financial system." Lisbon's difficulties demonstrated "the major surgery that Europe still has to undergo with respect to its economic and banking problems," said a note from CMC Markets UK.

The European Central Bank, the eurozone's main regulator, is examining the books of more than 100 of the bloc's top banks. The goal is to weed out the lame ones, helping ensure financial markets have faith in the banking system. The Banco Espirito Santo case could undermine that effort.

Portuguese authorities on Sunday sought to extinguish the Espirito Santo wildfire by splitting it into two banks: a new one, called Novo Banco, which keeps the company's healthy businesses and will later be sold, and a so-called bad bank that will hold toxic assets and retain the Banco Espirito Santo name. The bad bank will be put into liquidation, meaning it will cease to exist once the bad investments are dealt with.

Officials had last month attempted to halt the bank's collapsing share price by insisting the bank had sound finances and that private investors were ready to take it over. That was until the true picture emerged last week: The bank reported a record half-year loss of 3.58 billion euros ($4.8 billion), trading in its shares was suspended, and the Espirito Santo family's three main holding companies asked for bankruptcy protection.