News Archive

SoftBank’s first Sony smartphone deal takes aim at U.S. market

TOKYO (Reuters) – Japan’s SoftBank Corp and its U.S. mobile carrier Sprint Corp will offer a Sony smartphone for the first time, sources with knowledge of the matter said, as the two technology titans confront daunting challenges in the U.S. market.

The deal could give a much-needed boost to Sony’s struggling mobile division, which last month said it no longer expected to make a profit in the year to next March. It will also bolster Sprint’s handset line-up as it seeks to stem a flight in subscribers.

SoftBank, Japan’s second most valuable company, is pushing price cuts and promotions at Sprint while unveiling joint smartphone offerings to shore up the No. 3 U.S. carrier, after U.S. regulators thwarted its hopes for a merger to give it the scale to take on bigger rivals.

Sony, long one of Japan’s best-known brands but now struggling to pull its flagship electronics division out of the red, has been unable to gain traction in the key U.S. smartphone market, depressing a mobile unit that it hopes to make a pillar of its revival.

Sony managed only a 2.1 percent share of the global smartphone market in 2013, according to market research firm Gartner, and now faces rising competition from low-cost Chinese smartphones. In the U.S. market, the only carrier offering its handsets is No. 4 T-Mobile US Inc.

Sony will sell a soon-to-be launched Xperia flagship phone in the United States via Sprint, four sources familiar with the matter told Reuters. In Japan, SoftBank will make the phone available in time for the winter holiday season, they added.

Sony and SoftBank declined to comment.


Sony is expected to unveil its next flagship smartphone, the Xperia Z3, at next week’s IFA tech expo in Berlin.

But the company remains far behind the big names in the industry: Apple Inc, which is set to unveil its new iPhone 6 next month, and Samsung Electronics Co, which makes the Galaxy series.

“I can’t see this making much of a difference,” said Deutsche Bank analyst Yasuo Nakane of the Sprint deal, stressing the importance of a deal with a major carrier such as Verizon Communications Inc – along with ATT Inc one of the top two U.S. carriers – to get critical mass in that market. Sony offers an Xperia tablet through Verizon.

“Even if they put out a phone on Sprint, Verizon is the priority any way you think about it,” Nakane said.

Masahiro Ono, an analyst at Morgan Stanley MUFG Securities, nevertheless saw the deal as a move in the right direction.

“They haven’t been able to maintain very good relationships with carriers, unlike Samsung who has done very well,” he said.

Sprint’s aggressive strategy on new handsets and price cuts, with the unveiling last week of a smartphone developed by Sharp Corp exclusive for Sprint and SoftBank, is likely to accelerate under new chief executive Marcelo Claure, plucked from handset reseller Brightstar Corp which SoftBank acquired last year.

SoftBank CEO and founder Masayoshi Son has vowed bold moves by Sprint since a proposal to merge with T-Mobile US was withdrawn early this month.

(Writing by Sophie Knight; Editing by Edmund Klamann, Ryan Woo and Mark Potter)

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European investors cut stocks, eyeing Fed moves, Ukraine tension

LONDON (Reuters) – European asset managers cut their exposure to stocks in August as expectations of rate hikes in the United States pushed many to book profits while shares remained near record highs, a monthly poll shows.

A Reuters survey of 11 European chief investment officers and fund managers found the average recommended allocation to equities in balanced portfolios dropped to 45.7 percent from 49 percent a month earlier – the lowest since September 2013.

The pullback in equities benefited alternative investments, such as hedge funds, private equity and commodities. They rose to 7.2 percent from 5.6 percent. Property allocations rose to 1.7 percent from 0.5 percent.

“We decided last week, with equities actually not too far off their highs for the year, was a better time to lower our still constructive stance on equities,” said Steven Steyaert, a portfolio specialist at ING Investment Management.

Steyaert said a combination of geopolitical threats, such as the conflict in Ukraine, and mounting speculation the U.S. Federal Reserve will soon tighten monetary policy had prompted ING’s new stance on stocks.

The MSCI World Index .MIWO00000PUS, which tracks stocks from developed economies, is currently at 1,748, less than 1 percent off the record high of 1,765.77 points reached in July.

But even if U.S. interest rates rise soon, they are likely to remain low enough for investors to keep up their search for yield, Steyaert said, to the benefit of asset classes such as real estate.

Elke Speidel-Walz, the chief investment strategist at Deutsche Bank’s asset and wealth management arm, also highlighted the tension over Ukraine as leading both to greater risk aversion and to as well as a misfiring economic recovery in Europe.

“As recent macro indicators in the Eurozone have surprised on the weak side, this could lead to a new evaluation of the outlook for ongoing recovery in the Eurozone and hence impacting financial markets,” Speidel-Walz said.

Within global equity portfolios, the poll showed European investors allocating more to emerging markets and the U.S. at the expense of Europe and the UK. One respondent cited uncertainty over a referendum on Scottish independence next month as making British assets less attractive.

The average allocation in global equity portfolios to North America, where growth prospects look brighter than they do in Europe, rose more than a percentage point in August to 40.7 percent, the poll showed, the highest since July last year.

Meanwhile, allocations to the euro zone fell more than two percentage points to 30.2 percent. Those to the UK dropped to 6.3 percent from 7.5 percent a month earlier. Allocations to Asia excluding Japan rose to 6.3 percent from 5.8 percent in July.

(Editing by Larry King)

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Euro lifts, shares drift as ECB easing bets wane

NEW YORK (Reuters) – Global equity markets rose on a fresh round of strong U.S. economic reports on Friday, while German bond yields edged up from record lows as expectations that the European Central Bank would ease monetary policy next week faded.

Although euro-zone inflation dropped to a five-year low, it was not enough of a decline to force the ECB to enact monetary stimulus, analysts said. The data initially put a damper on European shares until new signs of an improving U.S. economy led a rebound.

U.S. consumer spending fell in July for the first time in six months, but a rise in consumer sentiment in August to a seven-year high suggested the retrenchment was likely temporary.

Other data showed a sharp acceleration in factory activity in the Midwest, underscoring the U.S. economy’s relatively strong fundamentals.

Charlie Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group, said he sees room to run in the five-year bull market because the outlook for earnings and economic data continue to improve, even though some investors are convinced the market is overvalued.

“You put together all this sort of steadily improving positives in terms of the economy with the fact that people hate the fact that the market won’t correct, and it just keeps going (up) and it appears like it’s going to,” Smith said.

European stocks closed higher, while Wall Street was mostly higher. MSCI’s gauge of worldwide stock performance .MIWD00000PUS also rebounded, gaining 0.08 percent.

The Dow Jones industrial average .DJI fell 1.26 points, or 0.01 percent, to 17,078.31. The SP 500 .SPX rose 3.93 points, or 0.2 percent, to 2,000.67, and the Nasdaq Composite .IXIC is added 16.43 points, or 0.36 percent, to 4,574.12.

The FTSEurofirst 300 .FTEU3 index of top European shares closed up 0.33 percent at 1,373.82 points.

European bond yields fell sharply across the euro zone at the start of the week after ECB President Mario Draghi highlighted a significant drop in inflation expectations in a speech at a meeting of central bankers in Jackson Hole, Wyoming.

Draghi’s comments raised expectations that the ECB would soon deploy a large-scale purchase of assets, known as quantitative easing, or QE. That view helped weaken the euro and boosted enthusiasm for stocks on both sides of the Atlantic.

“What people realize is that for the ECB to engage in public-sector QE … the ECB has to see the whites of the eyes of deflation,” said Wouter Sturkenboom, investment strategist at Russell Investments.

German 10-year Bund yields DE10YT=TWEB, the benchmark for euro zone borrowing costs, rose 1 basis point to 0.89 percent, having hit a record low of 0.86 percent on Thursday.

The benchmark 10-year U.S. Treasury US10YT=RR fell slightly, lifting its yield to 2.3360.

The euro EUR= retreated, falling 0.29 percent to $1.3144. having risen as high as $1.3195 soon after a report on euro zone inflation.

Against the yen JPY=, the dollar was up 0.32 percent at 104.03.

U.S. crude oil rose for a fourth straight day as the Midwest manufacturing data pointed to strong demand.

Brent LCOc1 for October delivery rose 47 cents to $102.93 a barrel. U.S. crude CLc1 gained 85 cents to $95.40 a barrel.

(Additional reporting by Marc Jones in London; Editing by Jonathan Oatis and Leslie Adler)

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Tragedy-hit Malaysia Airlines to lose 6,000 jobs in bold revamp

KUALA LUMPUR (Reuters) – Malaysia Airlines (MASM.KL) (MAS) will slash nearly a third of its 20,000 workforce and cut back its global route network as part of a radical 6 billion ringgit ($1.9 billion) restructuring following the devastating impact of two jetliner disasters.

The 42-year-old company will be de-listed by the end of the year under the broad revival plan announced by state fund Khazanah Nasional on Friday that aims to bring long-elusive efficiency and global standards to the loss-making carrier.

The 6,000 job cuts were higher than expected by the industry and mark a painful new blow for staff after a traumatic year for the national flag-carrier and the Southeast Asian country. Khazanah, which owns a majority stake in MAS, said it would invest in “re-skilling” those who lose jobs and pledged to set up a panel to improve often rocky relations between unions and management.

“Recent tragic events and ongoing difficulties at MAS have created a perfect storm that is allowing this restructuring to take place,” Khazanah Managing Director Azman Mokhtar told reporters in Kuala Lumpur.

“We believe that the 6 billion is not a bailout, we believe it will be recovered with re-listing,” he said.

Khazanah, which currently holds a 69 percent stake in MAS, will take 100 percent ownership when the carrier is de-listed. The state fund said this month that it would pay 1.4 billion ringgit to buy out minority shareholders.

Under the restructuring plan, which was approved by Malaysia’s cabinet this week, MAS’ assets and liabilities will be transferred to a new company with Khazanah injecting up to 6 billion ringgit.

Khazanah aims to return MAS to profit by 2017, and re-list the airline within five years, by which time it would be a more regionally focused airline “with lower cost structure and greater emphasis on revenue yield management,” the state fund said in a statement.

An international search for a new chief executive was underway, Khazanah said, and the current CEO Ahmad Jauhari Yahya would stay on until July next year.

Khazanah, which has injected more than 5 billion ringgit into MAS over the last 10 years, said its new fund injections would be strictly tied to the new company meeting performance targets.

“Success is by no means guaranteed,” Khazanah said.

Airline industry players said the revival plan appeared to be far more comprehensive and radical than several others that have been announced since MAS began struggling in the late 1990s after a period of rapid growth.

“The plan that has just been announced is comprehensive, credible and adequate even if painful for MAS staff and other stakeholders,” said Bertrand Grabowski, DVB Bank’s managing director in charge of aviation. DVB is a banker to MAS.

“It is comprehensive because it touches all the key weaknesses that the airline has not being addressing for years – an overstretched network and fleet in an ever more competitive environment, short haul and long haul.”


The drastic downsizing caps a wrenching year for the airline following the unexplained disappearance of Flight MH370 en route from Kuala Lumpur to Beijing in March and the shooting down of Flight MH17 over Ukraine in July.

Even before those deadly tragedies, MAS had been steadily falling behind high-end rivals such as Singapore Airlines (SIAL.SI) and been battered by the rise of Asian budget carriers like AirAsia (AIRA.KL).

The company hasn’t made an annual profit since 2010 and on Thursday revealed deepening losses and warned of more to come as nervous travellers steered clear of it after the disasters.

The restructuring is a bold move by the long-ruling government, which has used state firms such as the national airline as social tools to create jobs and reinforce policies favouring majority ethnic Malays over other races.

The main union at MAS has close ties to the ruling UMNO party – and has successfully resisted previous restructuring attempts.

“If we seek a different outcome from past experiences, we must have the courage to choose a different method,” Malaysian Prime Minister Najib Razak said in a statement.

“Piecemeal change will not work.”

The executive secretary of the main MAS workers union, Jabbarullah Kadir, declined to comment on the restructuring plan, saying the union had not yet agreed a position on it.

Khazanah said it aimed to reduced MAS’ net gearing to as low as 100 percent from 290 percent currently through debt-to-equity swaps. It said it had already secured a commitment from Malaysia’s civil servants’ pension fund to swap 750 million ringgit of Islamic bonds for equity.

The state fund did not give details on plans to reduce the carrier’s flight network, but said several of its European destinations would be reviewed. Malaysia Airlines will retain global flight connectivity through the Oneworld alliance and code-sharing, Khazanah said.

(Additional reporting by Anshuman Daga in SINGAPORE and Trinna Leong in KUALA LUMPUR; Writing by Stuart Grudgings; Editing by Ryan Woo)

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Draghi dials R for Reform. Line is busy

FRANKFURT (Reuters) – Two years ago, euro zone government leaders hung on Mario Draghi’s every word. Now the European Central Bank chief is struggling to get through to them. What has happened to ‘Super Mario’s’ mojo?

For financial markets, Draghi’s words still count. But therein lies a problem – his promise in 2012 to do “whatever it takes” to save the euro has reassured investors and driven down government borrowing costs to near record lows.

Euro zone governments, however, seem to have forgotten the caveat.

Draghi delivered his famous “whatever it takes” speech, and backed it up with a plan to buy “unlimited” amounts of bonds issued by stricken euro members – but only after governments agreed to his call for a “fiscal compact” on tougher budget discipline.

Now he is trying to cajole governments into agreeing a common approach to reforming their economies – a drive he sees as necessary to allow the stagnant euro zone to grow with verve.

“The essential cohesion of the (European) Union depends on it,” Draghi said in July, repeating the plea on Aug. 7.

He is having a hard time selling the message.

Like a groom dieting for his wedding day, many euro zone countries shaped up to gain entry to the euro zone, only to let themselves go once that big day was behind them.

With their borrowing costs now low thanks to market reaction to Draghi’s bond-buy offer, governments feel less pressure than at the height of the euro zone crisis to give him what he wants.

Draghi is seeking “common governance over structural reforms” – or a coordinated push to shape up by, for example, liberalizing labor markets.

Passing structural reforms is a tricky business at the best of times. But doing so under the banner of closer European cooperation is trickier still after voters’ noisy ‘no’ to deeper EU integration at European parliamentary elections in May.

There are also vested interests to contend with. France’s new economy minister ran into trouble with trade unions on Thursday for suggesting companies be allowed exemptions to the French 35-hour week.

“All these structural reforms involve challenging and defeating lobbies. They’re small, but they’re powerful – they have big voices,” said Richard Portes, professor of economics at London Business School.

Sharon Bowles, who worked with Draghi as chairwoman of the European Parliament’s Economic and Monetary Affairs Committee until July, said his push for governments to coordinate reforms and “to learn to govern together” was too much too soon.

“But I think he’s got to keep pushing so that there is no slip back,” she added.


The experience of the euro zone crisis has shown that only when faced with the prospect of ‘divorce’ – or the currency union breaking up – do governments get serious about budget tightening and reform.

In Italian Prime Minister Matteo Renzi, Draghi faces a young man in ‘dash-for-growth’ mode who wants to reframe the debate.

Renzi holds the rotating EU presidency for the second half of this year and has led calls to move from austerity to looser European budget rules.

Draghi has cut him some slack. After months of pressing governments – principally France and Italy – to reform with little effect, the ECB president has changed tack.

Speaking at the annual conference of central bankers in Jackson Hole, Wyoming, on Aug. 22, Draghi said it would be “helpful for the overall stance of policy” if fiscal policy could play a greater role alongside the ECB’s monetary policy, adding: “and I believe there is scope for this”.

Translated from opaque central banker-speak, the comments indicate that having cut ECB interest rates to record lows and injected money into the economy to support a recovery, Draghi is now also ready to back fiscal stimulus over austerity.

Fiscal stimulus could boost growth, facilitating reform.

“It’s much easier to introduce these (structural) reforms, to get people to accept these changes, if you have growth,” said Portes. “And at the moment it’s really tough, and everybody is out there trying to defend their special interests.”

In effect, Draghi extended a thinly veiled invitation to those countries with the room – such as Germany – to pursue a more expansionary fiscal policy as part of a three-pronged policy approach including ECB stimulus and structural reforms.

Sarah Hewin, head of research for Europe at Standard Chartered, said Draghi was in a tough position because “there is very little leverage to accelerate this reform process.”


Draghi is not having much luck with his reforms push – yet.

German Finance Minister Wolfgang Schaeuble has insisted the ECB president was “over-interpreted” in suggesting that fiscal policy could play a greater role in promoting growth.

In France, President Francois Hollande has reshuffled his government to boost his reform agenda but is struggling to galvanize his Socialists behind the plan. He also complains about the euro’s strength, pressing the ECB to do more.

In Italy, Renzi has yet to deliver break-through reforms, though he has made many promises and taken some small steps.

Draghi has one trump card: quantitative easing (QE) – essentially printing money to buy assets.

The ECB is preparing other stimulus measures, but markets have factored those in. It is the possibility of QE that excites them, and some governments – even if its merits are disputed.

Departing from his Jackson Hole speech text, Draghi noted “significant declines at all horizons” in inflation expectations – a hint he is concerned, and may act. At 0.3 percent in August, euro zone inflation is far below the ECB’s target of just under 2 percent.

The ECB is not ready for QE yet, but signs of serious progress on reforms in France and Italy could smooth the way.

“It may be hard to get a consensus within the (ECB Governing) Council to launch QE if the politicians are seen to be dragging their feet on reforms,” said RBS economist Richard Barwell.

“But with the bond market no longer threatening to tear the (euro zone) marriage apart and a growing consensus that the ECB will be forced to launch QE, Draghi is playing with a much weaker hand now. Politicians may be willing to call his bluff.”

(Writing by Paul Carrel Editing by Jeremy Gaunt)

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Major Carlsberg shareholder cuts stake

COPENHAGEN (Reuters) – The largest fund shareholder in Carlsberg (CARLb.CO), which has proven vulnerable to deteriorating conditions in Russia and has lowered its 2014 guidance, has cut its stake in the company by a quarter, the brewer said on Friday.

Carlsberg said Oppenheimer Funds’ (OPY.N) stake in the company is now 4.78 percent, down from 6.42 percent.

Carlsberg said this month that it expected full-year operating profit to decline by a low-to-mid-single-digit percentage compared with previous guidance of growth of low single-digit growth.

Its share price fell almost 7 percent to as low as 502 Danish crowns on Aug. 20 when it announced second-quarter results and cut its forecast. On Friday the shares were trading half a percent up at 525 crowns.

The beer seller derives 35 percent of its operating profit from Russia, where its Baltika label is the most popular beer brand. However, sales have been falling as the economy slows, in part because of Western sanctions over Moscow’s stance on Ukraine.

Carlsberg’s dependence on Russia makes it a test case for how European companies are coping with the chill in Moscow’s relations with the European Union.

(Reporting by Shida Chayesteh; Editing by David Goodman)

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Special Report: The billion-dollar fall of the house of Espirito Santo

LISBON (Reuters) – On June 9, with his 150-year-old Portuguese corporate dynasty close to collapse, patriarch Ricardo Espirito Santo Salgado made a desperate attempt to save it.

Salgado signed two letters to Venezuela’s state oil company, which had bought $365 million in bonds from his family’s holding company. The holding company was in financial trouble. But the letters, according to copies seen by Reuters, assured the Venezuelans that their investment was safe.

The “cartas-conforto” – letters of comfort – were written on the letterhead of Banco Espirito Santo, a large lender controlled by the family. They were co-signed by Salgado, who was both the bank’s chief executive and head of the family holding company.

“Banco Espirito Santo guarantees … it will provide the necessary funds to allow reimbursement at maturity,” said the letters.

There were problems, though: By promising that the bank stood behind the holding company’s debt, the letters ignored a directive from Portugal’s central bank that Salgado stop mixing the lender’s affairs with the family business. The guarantees were also not recorded in the bank’s accounts at the time, which is required by Portuguese law.

The following week, after intense pressure from regulators, Salgado resigned. Within a month, the holding company, Espirito Santo International, filed for bankruptcy, crumbling under 6.4 billion euros ($8.4 billion) in debt. In August, Banco Espirito Santo was rescued by the Portuguese state, after reporting 3.6 billion euros in losses.

The two letters, whose existence was made public last month but whose details are revealed here for the first time, are a key part of an investigation into the spectacular fall of one of Europe’s most prominent family businesses. Portuguese regulators and prosecutors are examining them along with the bank’s accounts and other evidence to determine whether there was unlawful activity behind the fall of the Espirito Santo empire.  

So far, shareholders and investors in the family companies and Banco Espirito Santo have lost more than 10 billion euros, making this one of Europe’s biggest corporate collapses ever.

The letters offer a glimpse into how Salgado ran the Espirito Santo empire and its crown jewel, the bank, virtually unhindered. In addition, interviews with family members, company officials and Portuguese regulators, as well as financial documents, show how the 70-year-old patriarch consistently blurred the lines between the bank’s interests and those of his family and even his country.

Around the time he signed the letters, Salgado sought public funds to save the family empire, arguing that it was important for Portugal.

“This is not just my problem, it’s a national problem,” he told officials at Portugal’s central bank, according to people at a meeting they held.

Salgado declined to comment for this story. One person close to him said Salgado had asked Portuguese authorities to help him fix the family business in 2013. The bank’s collapse, the source said, could have been avoided.

The corporate meltdown also shines a light on Portuguese and Luxembourg regulators and the gaps that can open up when companies span different jurisdictions. The Espirito Santo family companies were mostly registered in Luxembourg, while their main asset – Banco Espirito Santo – was in Lisbon. Little information was exchanged between regulators in the two countries. That helped hide the true state of the family companies’ affairs.

Portuguese financial regulators knew in January about deep financial problems at Espirito Santo International, the family’s Luxembourg-based umbrella holding. ESI, though, continued to borrow heavily in the months that followed, with deepening consequences for the Lisbon-based bank.

Luxembourg’s regulator CSSF said it did not supervise any holding companies of the Espirito Santo family, while the country’s central bank said it had no responsibility for supervising Espirito Santo entities.

Portugal’s central bank and its markets watchdog CMVM both say they acted promptly and efficiently. Portugal’s central bank says Banco Espirito Santo former managers repeatedly violated its directives. CMVM chief Carlos Tavares told a parliamentary committee earlier this year that the watchdog had examined Espirito Santo companies various times over the past six years and alerted prosecutors about possible wrongdoing after finding “signs of abuse of insider information” and a “possible crime of abuse of confidence.”

Portugal’s prosecutor general says there are now several investigations under way regarding the Espirito Santo empire, but has given no details.

Antonio Roldan, an analyst for Portugal and Spain at Eurasia Group in London, says the European Union, the European Central Bank and the International Monetary Fund, who arranged the 78 billion euro bailout of the Portuguese state in 2011, should also have spotted problems.

“Portugal was supposed to be under very close supervision” by international authorities as a condition of the bailout, he said.


In many ways, the rise of the Espirito Santo empire is a quintessentially European tale. Family dynasties such as the Agnellis in Italy or Germany’s Quandts have helped define the continent’s corporate history using their stable shareholder base and long-term planning as a recipe for growth. But Europe’s debt and financial crisis, which has left one in five out of work across the continent’s southern rim, has changed things. 

The Espirito Santo business was founded in 1869 by lottery dealer and currency exchange broker Jose Maria do Espirito Santo e Silva. The family guided its banking empire through World War Two by helping finance Europe’s trade in tungsten, a crucial ore found in Portugal and used to make weapons.

By the early 1970s, Portugal was in the last years of the Antonio Salazar regime, a dictatorship that looked favorably upon the Espirito Santos and their glamorous connections. After 1974’s peaceful “Carnation” revolution, the country’s left-wing government nationalized the banks and the Espirito Santo clan lost the business.

The following year members from the family’s five branches decided to rebuild their empire with $20,000 (around $90,000 at today’s value) of their own money and loans from several international banks.

The move offered a chance to shine for Ricardo Espirito Santo Salgado, great-grandson of the bank’s founder. He had joined the family business a few years earlier as a mild-mannered 31-year-old to head Banco Espirito Santo’s economic studies unit. Once the family set out to rebuild he opened a bank in Brazil, together with French lender Credit Agricole. In the mid-1980s, when Portugal began to encourage private investment again, Salgado returned to Lisbon and set up a new bank, again with Credit Agricole. He bought back an insurance firm, called Tranquilidade, that the family had once owned.

The family business grew. So did its ownership structure. At the top was Espirito Santo Control, a non-listed holding company that owned Espirito Santo International, the umbrella for businesses spanning hotels, property and finance. Luxembourg-registered ESI was 57 percent owned by the family, with the rest held by friends and Portuguese executives who wanted “a seat at the Espirito Santo table,” according to a person close to the family. Through an intermediary company, ESI owned Espirito Santo Financial Group (ESFG) which in turn owned Banco Espirito Santo.

A family council, with representatives of the five branches, ran the shop.

Salgado’s big break came in 1991 when the Portuguese state sold Banco Espirito Santo back to the family and Credit Agricole. Salgado became chief executive. Under his leadership the bank more than doubled its share of the Portuguese lending market to 20 percent in 2013, becoming Portugal’s second-largest lender after a state-run bank.

According to people who worked with him, Salgado was courteous but distant. Every year, at a meeting with senior staff in a Lisbon hotel, he would sit in the middle of the room, shooting detailed questions to department bosses. At family company board meetings, he rarely faced dissent. “People never turned around and said, ‘no, you can’t’,” said a person who attended the meetings.

The Espirito Santos lived in style. Isabel de Melo, matriarch of one family branch, hosted grand parties in her country estate outside Lisbon, a mansion whose dining room comfortably seats 75. On her piano sat silver-framed photos of the family with Richard Nixon, the Rockefellers and the King and Queen of Spain.

Salgado himself built a holiday home in the coastal estate of Comporta, a sprawling estate larger than Lisbon that the family has been developing into an up-market tourist spot. Every Christmas Eve he gathers 50 family members for lunch at Visconde da Luz, a traditional wood-panelled restaurant near Lisbon.


Portugal fell into recession after seeking its international bailout in 2011. As part of the bailout terms, Banco Espirito Santo, like other Portuguese banks, was no longer allowed to pay dividends to its shareholders, including the Espirito Santo clan, who at that time owned a majority stake in the lender. That meant a big source of the family’s income was gone.

The stock market value of Banco Espirito Santo fell to 1.97 billion euros at the beginning of 2012 from 3.5 billion a year earlier – costing the family 420 million euros on paper. Most banks sought state-backed loans. Banco Espirito Santo did not. Salgado boasted the bank had maintained “strategic independence.”

Turnover at the family’s hotel, property and other businesses suffered. To avoid selling assets or losing their controlling stake in the bank, the family companies, led by Salgado, simply borrowed more – including from the bank, and from the bank’s customers.

For the first time, though, not everyone agreed with the patriarch’s approach. Among the dissenters was Jose Maria Ricciardi, a cousin of Salgado’s who headed the bank’s investment arm. In early November of 2013, Ricciardi organized a small gathering of family members at his father’s house.

According to a source with knowledge of the meeting, Ricciardi said he was worried about the family empire’s debt. In particular, Ricciardi was concerned about the way the empire was financing itself by selling bonds of the family businesses to clients of Banco Espirito Santo. He argued that Salgado should step down.

Ricciardi went public with his criticism of “practices” at the group but did not give details. He urged Portuguese financial regulators to order an overhaul.

But at another family meeting on November 7, he was overruled. Even his own father voted to keep Salgado on. “I did not support my son … to avoid an immediate institutional break” within the family, said Ricciardi’s father, Antonio Ricciardi, in an email to Reuters at the time.

The reason for the family tensions soon became clear to Portuguese regulators. The Bank of Portugal had earlier reviewed the top borrowers at the country’s largest banks and discovered Banco Espirito Santo’s heavy loans to Espirito Santo family companies. The central bank asked auditors KPMG to go through ESI’s accounts and the results were shocking: ESI’s accounting had “materially relevant” irregularities that put into question the “veracity and completeness of accounting records,” according to a copy of the KPMG report seen by Reuters. The report’s contents have not been detailed before.

KPMG found that ESI had either not recorded or had under-reported financial liabilities and risks, had grossly overvalued its assets, and had scant evidence for its reported transactions. The 6.4 billion euros of debt it held at the end of September 2013 was an “atomic bomb,” according to a person close to ESI, because most of it had to be paid back within one year.

KPMG would not comment for this story.

After the audit, the Bank of Portugal moved to protect Banco Espirito Santo from its founding family.

It ordered the bank to make sure any loans it had made or would make to family businesses were secured by assets, in case the family could not repay its debts. The central bank also ordered that any of the bank’s retail clients who had bought bonds from the family business be given guarantees that their money was safe.

The existence of the audit was not made public at the time. But Reuters has learned that four months later, in April, the board of ESFG – the family company that owned a 27.4 percent stake in Banco Espirito Santo – was alerted to the problems at its parent company ESI.

During a teleconference meeting, some directors argued that they should publicly disclose the problems, because ESFG’s other shareholders and creditors had a right to know. But Salgado, who was both CEO of ESI and ESFG chairman, argued for silence. “He recommended the board let him deal with the situation. The board believed in him and that his recommendations were the right things to follow,” said a person with knowledge of the board meeting.

Salgado decided that ESFG would provide guarantees to Banco Espirito Santo’s retail clients who had invested in family bonds, according to a person familiar with the decision. Salgado had previously argued within ESFG that it was in ESFG’s interest to guarantee bank clients, because the lender was its most valuable asset.

Some at ESFG, however, thought this was unfair to the company’s other shareholders and creditors, the person with knowledge of the board meeting said.

Parent company ESI set out to repay the bonds it had sold to Banco Espirito Santo retail clients. There was a problem, though: The reimbursements didn’t come from new revenue. Instead, ESI and other family companies issued even more debt.

The companies issued bonds through an opaque transatlantic ping pong, involving an ESFG holding company in Panama and another family-linked firm, according to people familiar with the family company accounts. Many of the bonds – whose value could reach five billion euros – ended up back in the hands of Banco Espirito Santo clients. That opened up the prospect that the bank would have to compensate clients in the event that the holding company could not repay the bonds.  

The problems at ESI were publicly disclosed on May 20, as Banco Espirito Santo told investors that it would raise more capital. The empire kept up a brave face. Earlier that month, the bank had prepared a slide show for investors titled “Wisdomland,” playing up the family’s history and reputation. “Wisdom is something that needs time to grow.”

Now, though, in addition to disclosing the financial problems at ESI, the bank told investors that it had sold debt in family parent company ESI to its customers. It said this posed a “reputational risk” for the bank. If ESI defaulted, customers could start asking questions about how the debt was sold, and the bank’s brand could suffer, especially if there was any hint it knew the bonds were risky.

Salgado told a Portuguese business newspaper that the extent of ESI’s problems hadn’t previously been known. “We didn’t know that there was such sickness as we have subsequently found inside ESI,” said Salgado, ESI’s chief executive at the time. “There was serious negligence. I don’t think there was wilful misconduct.”

These assurances helped the bank complete its one billion euro capital increase.

In the weeks that followed, the true extent of the bank’s links with its troubled founding family began to emerge. Investors panicked. Shares in Banco Espirito Santo would dive 87 percent in the following two and a half months.

In early June, Salgado made his move to save the business, and his name.

He first visited members of the Portuguese government and central bank governor Carlos Costa. Salgado asked both for loans worth 2.5 billion euros to avoid the collapse of the family company. He said an implosion of the Espirito Santo group would reverberate throughout the economy.

The officials refused. “We will not use public instruments to solve problems of a private nature,” Prime Minister Pedro Passos Coelho said. “When private companies do bad business they have to bear the costs.”

Salgado and his cousin, Jose Manuel Espirito Santo, signed the letters for the bank to guarantee the family debt bought by PDVSA, Venezuela’s state oil company. PDVSA and a Venezuelan state-owned fund, to whom one of the letters was addressed as a proxy of the state oil firm, declined to comment on the correspondence. It is unclear whether PDVSA will get its money back.

The letters were not shown to the bank’s internal audit committee and were not recorded at the time in the bank’s accounts. The Bank of Portugal later said this violated the law.

In late June, Portugal’s central bank chief organized a meeting with representatives of the five Espirito Santo family branches. At the meeting, Costa ordered family members, including Salgado, to step down from top management of the bank. New executives would be named.

Weeks later, Espirito Santo International filed for creditor protection in Luxembourg, and most of the other family firms followed suit. Salgado presided over a July 18 meeting to discuss the bankruptcies. “He was cerebral and polite, but imperial as always,” said a person who saw him at that time.

A few days after Banco Espirito Santo reported a record loss of 3.6 billion euros for the first half of 2014, Portugal bailed it out. The state formed a new bank, called Novo Banco from the healthy parts of the old lender.

Salgado has now set up an office at a high-end hotel in the coastal resort town of Estoril. He has mostly stayed silent throughout the affair. In a brief interview with a local newspaper, he said: “I will fight for honor and dignity, mine and my family’s.”

Quoting Pope Francis, he added: “Don’t cry for what you have lost; fight for what you have.”

(With additional reporting by Axel Bugge; Writing by Alessandra Galloni; Edited by Simon Robinson)

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Bulgaria may let Corpbank depositors get partial access to accounts

SOFIA (Reuters) – Depositors at Bulgaria’s Corporate Commercial Bank (Corpbank) 6C9.BB may get partial access to their funds at the troubled bank in September, Interim Finance Minister Rumen Porozhanov said on Friday.

“We debated issues of partial access to deposits as of next month,” Porozhanov told the local channel bTV after meeting with European Commission’s delegation in Sofia.

Bulgaria’s fourth-largest lender was hit by a run on deposits in June that led to Bulgaria’s biggest banking crisis since the 1990s.

Corpbank was placed under the control of the central bank and has since remained shut pending an audit of its books, due to be completed by October. That left angry customers without access to their deposits.

(Reporting by Angel Krasimirov; Editing by Larry King)

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Germanwings pilots start strike as Lufthansa row rumbles on

BERLIN (Reuters) – Pilots at Lufthansa’s (LHAG.DE) budget carrier Germanwings staged a six-hour strike on Friday, disrupting travel plans of thousands of people returning from summer holidays and putting pressure on Lufthansa management in a pension scheme dispute.

Pilots’ union Vereinigung Cockpit (VC) wants Lufthansa to maintain an early retirement scheme that allows pilots to retire at 55 and still receive up to 60 percent of their pay until state pension payments kick in.

The airline argues that there is no need for the scheme, given rising life expectancy and a court ruling that pilots can now work until the age of 65.

The dispute is set against the backdrop of a Lufthansa overhaul to boost competitiveness against no-frills rivals and Gulf carriers, seeking to lift annual group operating profit to 2 billion euros in 2015, up from its forecast 1 billion in 2014.

A three-day nationwide strike by Lufthansa pilots in April over the same issue effectively grounded the airline and wiped 60 million euros ($79.04 million) off its first-half profit.

VC, which represents about 5,400 pilots across the Lufthansa group, said it could not rule out further action over the weekend or the coming week, but that it would give a day’s notice of any strike.

“We can’t rule out that it may come to strikes at Lufthansa and Lufthansa Cargo,” spokesman Markus Wahl told Reuters TV, referring to Lufthansa’s flagship brand and its freight unit.

Lufthansa shares were down 1.7 percent at 1059 GMT, the biggest faller on a 0.3 percent stronger DAX .GDAXI, hit by the dispute and concerns a volcano eruption in Iceland could affect aviation.

“It seems as though this dispute could last a relatively long time, because the pilots are not showing any signs of being ready to compromise,” said Bankhaus Metzler analyst Juergen Pieper.

About 700 of the Lufthansa group’s more than 9,000 pilots work at Germanwings, which mostly operates short-haul flights from smaller German airports and not Lufthansa’s main Frankfurt and Munich hubs.

Germanwings cancelled 116 flights on Friday – equivalent to 70 percent of its scheduled flights for the strike period, 0400 GMT (0000 EDT) to 1000 GMT (6000 EDT).


The nationwide strike in April drew ire from the German public, as people criticised the demands of what many regard as a highly paid group of workers, and the latest action has renewed calls for the government to take action against unions representing smaller groups of workers.

The Germanwings walkout is the fourth strike to affect Lufthansa’s operations in 2014. Earlier this year, security staff and public-sector workers chose to strike at Frankfurt airport, disrupting travel and bringing chaos to the Europe’s third-largest airport.

The pilots are also in discussions with Lufthansa over pay increases, although they say the pension scheme rather than pay is the main reason for the strikes.

Columnist Franz Joseph Wagner at best-selling German daily Bild on Friday described the action by the pilots as “crazy”. In his regular column he wrote: “I got it wrong with you pilots. I thought it was flying that was important, not the money.”

Lufthansa, which says there needs to be rules in place to protect companies where many different unions are active, urged the pilots to return to the negotiating table.

“We’ve made concrete offers. It’s up to VC now,” a spokesman said.

Airports served by Germanwings, such as Cologne-Bonn and Berlin Tegel, were mainly quiet on Friday morning, with many passengers having rebooked or cancelled.

At Berlin Tegel, a flight to Milan Linate was among the cancellations. The Bernasconi family were originally booked to Linate, but are now having to make a stop in Munich before going to Milan’s other airport, Malpensa.

“We expect this in Italy, but not in Germany,” they said as they rebooked their tickets.

($1 = 0.7591 euro)

(Additional reporting by Reuters TV and Ralf Banser; Editing by David Goodman and Pravin Char)

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