The further you delve into the Banco Espirito Santo saga the more ridiculous and incestuous it gets.

First you have Banco Espirito Santo, which is Portugal’s second-largest bank but lost a half-billion dollars last year. Despite the problems, it actually seems like a relatively healthy and well-capitalized operation but it goes wonky from there.

The next level is Espirito Santo Group, which owned a 25% stake in the bank. Or at least it did until yesterday when it was forced to sell 5% at fire sale prices because it had $100m loan to Nomura due. Earlier in the week it missed a payment on commercial paper. It’s clearly in a major cash crunch or worse.

The next level is a company called Rioforte which owns a 49% stake in Espirito Santo Group (not the bank). They might be in big trouble because they have $1.2 billion in short-term debt due today and Thursday. Rioforte, in turn, is held by Espirito Santo International (not the bank, not the group).

It gets worse from there because Portugal Telecom, for some reason, was the one who gave them the loan in a highly suspect deal that just cost the Portugal Telecom CFO his job. The thing is the family that owns a large part of the other 75% of Banco Espirito Santo also has a large stake in Portugal Telecom.

Meanwhile, the mess threatens to cross the Atlantic because Portugal Telecom is in the midst of a merger with Brazilian telecom Oi and that company (and the Brazil development bank that sponsored it) had no idea about the massive loan to Rioforte. Meanwhile, Luxembourg is now investigating the debt deal — you know it’s fishy when Luxembourg investigates.

Short story: The parent company is in big trouble.

The main questions right now:

  • Will Riofort default on the Portugal Telecom loan? (most likely)
  • Will Oi walk away from the merger? (hard to say)
  • Are the problems ring fenced from the bank (probably not, the bank lent money to Espirito Santo International and tried to dump it on clients)
  • Will Portugal be forced into a bailout (doubtful because it was the Bank of Portugal that exposed it and the govt has refused aid)

Overall, it looks like the Espirito Santo family bought off the wrong politicians because the government is walking away:

“Companies that look more to friends than competence pay the price, but that price shouldn’t be paid by society as a whole, and much less by taxpayers,” Prime Minister Coelho said on the weekend.

This could be a Lehman moment in Portugal.