EUROPE MARKETS: European Stocks Flat After Portugal Bank Bailout

By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- European stocks were largely flat Monday, with markets cautious after Portugal's central bank unveiled a bailout plan for troubled bank Banco Espírito Santo.

Under a plan outlined late Sunday, toxic assets at Banco Espírito Santo will be put into a so-called bad bank that will eventually be wound down. The move that comes amid concerns that the broader euro area could be hurt by troubles in Portugal's banking sector.

Assets and deposits deemed healthy will be part of a "good" bank to be rebranded as Novo Banco. That bank will receive an injection of 4.9 billion euros ($6.58 billion) from a special bank resolution fund that Portugal set up in 2012. Novo Banco will be sold and proceeds used to pay back the fund.

Banco Espírito Santo, the second-largest lender by assets in Portugal, last week posted a record second-quarter loss of EUR3.49 billion ($4.68 billion), after its embattled parent company found ways to use the bank and its customers to raise funds now largely unrecoverable.

On the data site, producer prices in the euro zone rose 0.1% in June month-on-month, Eurostat said Monday. The reading suggests consumer prices are unlikely to rise rapidly in coming months and comes after the European Central Bank, with an eye on low inflation, introduced additional stimulus measures.

Market moves: Shares of Banco Espírito Santo were halted on Friday and were expected to be delisted. They've plunged roughly 87% for the year, according to FactSet data.

But stock in Banco Comercial Português SA rose 3.1% while Banco Internacional do Funchal SA lost 2.3%. The Portugal PSI 20 stock index edged up less than 3 points to 5,800.01.

On the broader European market, the Stoxx Europe 600 index was off less than 1 point at 331.87. Germay's DAX fell 0.1%. But France's CAC 40 index rose 0.5% to 4,224.56 and the U.K.'s FTSE 100 index was up 0.4% at 6,702.

Comments: Citi downgraded Banco Espírito Santo to a sell/high risk rating saying the value of legacy shares of the "bad" bank is highly uncertain. "Given the uncertain nature of the outcomes (in our view), we choose to be conservative and assign a target price of EUR0.01," wrote analyst Stefan Nedialkov in a report Monday. The previous rating was neutral/high risk.

Barclays on Monday said the sovereign financial implications of Banco Espírito Santo's troubles remains limited, but investors are likely "to remain guarded about risks which could stem from latent problems in the financial system as the amount of financial resources left available to deal with any potential problem in the banking sector has declined substantially."

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