How many more banking collapses will we see in Portugal?

This weekend has seen yet another bank bailout in Portugal and consequent costs for the Portuguese taxpayer. This of course follows on from the collapse of Banco Espirito Santo back in August 2014 and begs yet another question about the recovery in Portugal’s economic situation. It is particularly unfortunate that it involves a bank that was supposed to have been rescued by the state back in 2013.Those who followed the story of Banco Espirito Santo will remember a tale which itself involved plenty of slip sliding away as well as misrepresentations and likely corruption. It also reminds me that last week when I was analysing the ongoing problems of UK banks that sadly there are countries where the situation is even worse. So let us take a look.

The 2013 bailout

Let us jump into the TARDIS of Dr.Who and go back to the 31st of January 2013.

The European Commission has temporarily approved, under EU state aid rules, a recapitalisation totalling €1.1 billion granted by Portugal to Banco Internacional do Funchal S.A. (Banif) for reasons of financial stability.

Oh no “temporarily” ! There was a clear warning signal although not quite as clear a warning as “on track”.. Back then there was a sign that there has been serious trouble here.

In view of the significant aid the bank received with regard to its size (approximately 10% of risk weighted assets) and of the seriousness of its problems, this plan needs to provide for a material overhaul of the bank’s business model…

Portugal was supposed to have it all sorted by the end of March but as we now know the new business model has not turned out to be any more successful than the old one. for those wondering about Banif here is some more detail.

Banif is currently the eighth-largest commercial bank in Portugal when measured by book asset value, with a large regional presence in the Azores and Madeira. It is listed on the Lisbon Stock Exchange. At the end of 2011, it held total assets amounting to €15.8 billion.

This reminds me of my point last week about banks which is that whilst new and usually higher capital requirements are welcome in a real crisis they are invariably not enough and we see here that a bailout of 7% of risk assets was required.

Bringing matters up to date

On the 15th of this month the Bank of Portugal announced that it was looking more deeply into matters. In other words Banif was one of the “still substantial challenges and risks,” it has mentioned in its Financial Stability Report. There were Northern Rock style queues around branches after one TV network suggested that deposits were at risk. The head of the bank issued a comforting communique according to The Portugal News.

The CEO of Banif, Jorge Tomé, also looked to allay growing fears this week, when he said that the bank had “comfortable liquidity” and guaranteed that “the depositors and tax payers could rest easy”.

I guess you are already fearing for what happened next as the only thing worse than an official denial would have been a claim that things were on track. Let us move forwards to this morning’s statement from the European Commission.

The Portuguese authorities notified to the Commission plans to grant €2.255 billion in aid measures to support the sale of Banif’s assets and liabilities to the purchaser, as well as aid amounting to €422 million contained in the asset transfer to the asset management vehicle. An additional buffer in the form of a state guarantee is also approved to cater for potential recent changes of values in the part bought by Banco Santander Totta, bringing the total potential aid measures up to €3 billion.

There are various references to this being in addition to the original 1.1 billion Euro “rescue” of 2013 as we see something beginning to resemble a bottomless pit. The “serenity and tranquility” referred to only a week ago by the bank’s head seems about as realistic as Portugal’s taxpayers being able to “rest easy”!

If we look at this in numerical terms we see that the total rescue cost is well over 3 billion Euros and could head towards 4.1 billion Euros. Okay to rescue what?

In the 3rd quarter of 2015, Banif’s consolidated balance sheet amounted to €11.9 billion.

That is an extraordinary percentage on what must have been some dreadful lending back in the day. Also according to Reuters the deposit base is only this.

The small Madeira-based bank has a market capitalization of 91 million euros ($98 million) and had deposits of 6 billion euros at the end of September.

Everything about the bank is small except the bailout. It was heading towards a one for one backing of the deposits.

There was a small repayment today as Santander paid 150 million Euros for the good part of the bank. But against that the Portuguese state has had to put up some 1.77 billion Euros and the Bank of Portugal’s Resolution Fund has put up 489 million Euros. In theory the Resolution Fund is provided by bank levies but Eurostat usually does not see it like that and adds it to the Portuguese national debt.

A catch with this style of Resolution Fund can be seen as an even weaker Portuguese banking sector finds itself being called to pay up again and again and of course weakens further.

What about Novo Banco?

Those who recall the collapse of Banco Espirito Santo may recall the confident proclamations about the Novo Banco which emerged. However the sale planned for September this year was cancelled. Then November produced some news which after all the bailouts was really rather stunning.

Novo Banco successfully completes the ECB Banking Supervision stress test in the baseline scenario. A shortfall of EUR 1,398 million was identified in the adverse stress test scenario, which is in line with expectations.

So successful it had a shortfall in the adverse scenario. Let us just stop and remind ourselves that this is supposed to be the “good bank” part as in clean. Anyway the whole thing was so “successfully” completed that last week it submitted plans to raise at least another 1.4 billion Euros of extra capital.

You might think therefore that last week was a bad time for a judge to do this. From The Portugal News.

The Portuguese judge, Carlos Alexandre has repealed the house arrest measure he had handed down to the former CEO of Banco Espírito Santo (BES), Ricardo Salgado,


We see that seven years into the credit crunch and five years after the Euro area crisis began that problems with the Portuguese banking system continue to emerge. The problem with a strategy that involves kicking the banking can into the future is that it requires it to be better like a clear blue sky whereas in fact there are still plenty of economic clouds to be seen. One clear one has been the way that the Portuguese national debt rose to 130% of its GDP at the end of 2014. Or to put it another way the numbers quoted today can be looked at in the context of a national debt of around 228 billion Euros.This is not an issue in terms of funding it as the ECB QE purchases are keeping those costs remarkably low although of course we are seeing a problem shifted from one balance sheet to another in a familiar trend. The problem is how will Portugal get into a situation where it is under some sort of control?

There is economic growth to be found (year on year 1.4%) in what has been the best phase for Portugal for many years as a low oil price and ECB monetary easing combine. But unless it speeds up Portugal will remain troubled and at risk especially as there seems to be a regular blow-up in the banking sector. If we go back in time there must have been some extraordinarily incompetent lending must there not? It is hard also not to think of the report from Unmask The Corrupt discussed in The Portugal News.

Portuguese bank Banco Espírito Santo and the daughter of the Angolan president Isabel dos Santos, are among the 15 “most symbolic cases of grand corruption” in the world that Transparency International put to a vote on Wednesday.

Oh and the timing of the move on Banif was to avoid the bail-in rules which come into play next year.

Oh, what a tangled web we weave

When first we practise to deceive!

( Walter Scott)








13 thoughts on “How many more banking collapses will we see in Portugal?

  1. So the Banif CEO lied to persuade people with money in the bank to keep it there. He publicly provided incorrect information to influence large numbers of people to act against their best interest.

    Of course he has been arrested, charges bought and a date set for his trial…?

    • Hi Chris

      I somehow doubt it and there was more to the relaxation of rules on the former head of BES in The Portugal News.

      “The source added that Ricardo Salgado would no longer have to post the €1.5 million bail the court had set in November after reappraising the measures……The former banker is involved in several cases of money laundering, tax fraud and related crimes. ”

      He is forbidden from leaving the country still.

      It is a bankocracy…

  2. I was always under the misapprehension that Brussel’s bank stress tests were for testing their resilience, but I’ve now realised they are to work out the stress levels that are just about to hit a bank’s depositors, shareholders, the nation’s finance ministers and their sovereign debts!

    The stress tests seem to be about as useful as the UK’s BOE and FCA combined!

    I’m sure there is still plenty to run on EU bank restructuring and the Euro debt crisis. I’ve got a big comfy viewing chair, I now just need to get a big bag of peanuts to shell while watching the 2016 show.

    • Hi Rods

      What was rather odd was the way that the Bank of Portugal was trying to dismiss the adverse scenario.

      ” In the light of these developments it is fair to conclude that the adverse scenario, which is designed by nature to be less likely than the baseline scenario, incorporates projections which, at this stage, are even less likely to materialise.”

      Er yes they are adverse and there to see if a bank can withstand trouble, thats the point.

      As you say though the whole stress test program in the Euro area has been something which has less and less credibility.

  3. Shaun,
    It’s debatable which constitutes the bigger threat to the rule of law, democratic values, capitalism and our way of life generally:
    (a) Islamist jihadis or
    (b) bankers.

    • Hi Ian

      At the moment I would say bankers wouldn’t you? I mean that on a collective level as obviously some people have suffered horribly and worse at the hand of ISIS. But everyday the bankers are chipping away at something or the other.

      Let us hope that there is no connection between the two

  4. Hi Shaun.

    Isabel dos Santos, eh? There’s a name that rings a bell or three.

    When all is said and done two things remain. First, Portugal’s entry is quite modest by European standards. I have mentioned it because it is more revealed for what it is, than similar corruption in other countries. Second, much has been written about how the West needs to help the ‘third world’ to become more like us.We like to tell ourselves that we are helping ‘to build their institutions’, ‘reduce their corruption’ and export to them our values and ways of doing things. The truth however, is that via our putrid and rotten financial system and the small elite who own and run it, we have been busy importing their corruption to add to our own, allowing our institutions to become as corrupt and in-the-service of the guilded few, as theirs.

    Remind me how wonderful our democracy is, how healthy and robust it is, how the rule of law is sacrosanct in Europe and stands ready to protect the many against the powerful few. Just remind me … if you can.

    • Hi Jim M and thanks for linking to quite a powerful piece.

      I have been exchanging tweets with someone called Weayl on twitter for a couple of years or so now. His ( I think he is male) analysis is based on the web of corruption he sees in the families which have controlled Portugal for many years and their more recent links with Angola in particular.

  5. Hello Shaun,

    “ will Portugal get into a situation where it is under some sort of control?”

    As the EU is a political project for which there is no escape ( Hotel California ) then the solution is closer union , or as I have often pointed out , The United States of Europe ( Franko-German Empire) .

    The banks across Europe and not just Protugal are fundamentally BROKE. Only EU QE is keeping them afloat …. until they are all under one roof

    and one control

    It’s not democratic and has been shown that its fundamentally corrupt

    We maybe given the vote in the UK but as I predicted when it comes to the actual vote everything and anything will be done to make it a yes vote to stay in !

    the PIIGS are on life support until the Euro Borg can assimulate them


    PS: nothing can be done , sit back with some popcorn and a comfy chair .
    ( Baltic Dry , oil and commodities prices …… gonna be an interesting 2016 ! )

  6. Shaun, very sorry that this is off the topic of your excellent blog, but I thought you and your readers might be interested since you have written a lot on the issue of the target rate of inflation for a central bank.

    I had the honour of meeting Maxime Bernier, the federal MP for Beauce, Québec, when he spoke Saturday evening at the Lieutenant’s Pump Pub in Ottawa. He is one of the candidates to succeed Stephen Harper as the leader of the Conservative Party of Canada in 2017. I am ashamed to admit it, but I was unaware that he has been consistently in support of the Bank of Canada’s lowering its target rate of inflation from two percent since at least November 2009. Attached is an op-ed that he published in the Financial Post in December 2010 criticizing Mark Carney’s policies at the time:
    By the way, when Mr. Bernier published that op-ed the last inflation rate published was 2.4% for November, already above target, but within six months it would peak at 3.7% in May 2011.
    Through that whole period, Carney thought he should look through the headline inflation rate, and did not raise rates.

    If there are any other politicians with a shot at the leadership of a governing or opposition party in the G-20 who are advocating a lower target rate of inflation for their country’s central bank, I don’t know who they are.

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