Portugal bank crisis: 4 reasons to keep calm

July 11, 2014: 7:43 AM ET
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LONDON (CNNMoney)

European financial markets have begun to calm down from the shock waves sparked by a Portuguese bank's struggles, which revived memories of the region's debt crisis.

European stocks, which slumped Thursday, rebounded slightly early Friday. Shares in Banco Espirito Santo, which plunged 17% before trading was suspended Thursday, rose in Lisbon Friday as the stock resumed trading.

So what's going on and why does it matter? Here are four reasons to stay calm:

1. It's a local problem: Banco Espirito Santo (BES) may be a big player in Portugal, but it accounts for less than a fifth of the country's total banking assets and only 0.25% of the eurozone banking sector.

France's Credit Agricole (CRARF), a much bigger international bank, stands to lose heavily on its 15% stake, but BES does little international business. Analysts at Commerzbank reckon 72% of the bank's loans are domestic, with Angola (12%) and Spain (6%) its only significant foreign markets.

2. Regulators are on the case: Portuguese authorities have already forced the bank to raise €1 billion to strengthen its finances, and are in the process of overseeing the appointment of new management. That will end the control of the Espirito Santo family and improve corporate governance at the bank.

Those measures should provide insulation against further problems in the wider Espirito Santo group, which has been rocked by revelations of financial irregularities and the possibility of default.

Still, investors will want clarification quickly from the bank on the extent of its exposure to those risks.

Related: Europe steps up fight against deflation risk

3. Europe is getting its act together: Eurozone banks are still far from perfect but they've come a long way in the last two years. EU leaders have given themselves the tools to calm market panic by creating a permanent bailout fund -- the European Stability Mechanism -- and putting in place the essential elements of a banking union.

The European Central Bank is reviewing the assets and resilience of the region's most important banks, and eurozone states have agreed to rules on how to rescue -- or wind down -- banks that get into trouble.

Related: It's official: Austerity drives down Europe's deficits

4. Portugal is in better shape: It's just two months since Portugal staged a clean exit from a painful bailout led by the EU and International Monetary Fund. Painful and deeply unpopular reforms have restored its competitiveness -- its economy is now growing faster than the eurozone by some margin, and unemployment is falling faster than elsewhere.

That track record should mean it can count on the support of its European partners if the BES crisis turns into a wider problem for Portuguese banking.

"In the very unlikely case that Portugal needed outside support to deal with a banking issue, its reform record would probably allow it to draw on ESM funds for its banks in the way that Spain did without onerous new conditionality," wrote Berenberg economists in a note.

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