Portugal has more trouble than it can handle with its banks

The collapse of Lehman Brothers was nearly 8 years ago now but we find that the banking industry still looks in trouble in quite a few places. One particular outbreak of this is in the Euro area. Over the weekend we saw the first major application of the new banking rules as Heta Bank of Austria imposed a face value haircut on creditors of 54% which looks in excess of 75% once interest-rate changes amongst others are also factored in. This poses more than a few problems for the province of Carinthia This week also sees the formation of the Italian banking bailout fund of 5 billion Euros called Atlante which according to a puff piece by Bloomberg is “audacious” by Italy’s “boyish looking” Prime Minister Renzi although it does not look especially audacious compared to this.

Total lending to borrowers considered insolvent reached €200.9 billion in December,

The Reason

There are several interrelated factors here and this is where Italy and Portugal come together. Both have tried as much as possible to keep any banking bailout off the public books because they have problems with the size of their respective national debts which both weigh in at around 130% of Gross Domestic Product. Why is this so? Well a major driver of this has been the way that even in the relatively good years both countries struggled to get economic growth averaging more than 1% per annum and since the credit crunch both have seen severe recessions from which they have failed to fully recover.

This means that not only are the public finances in poor shape there has been little opportunity for private and banking finances to improve as well. Right now has been about as good as it has got for banks in Portugal as we note that the economy grew by 1.5% in 2015 and house prices did this.

The House Price Index (HPI) increased 3.1% in 2015 when compared with the previous year. This result was 1.2 percentage points (p.p.) lower than what was observed for 2014.

So actually they should be doing better than they are. I shall return to this point but for now let me point out that according to Eurostat the Portuguese private-sector had debts of 180.1% of GDP at the end of 2015. So if the total debt as a ratio of economic output looks rather like Greece which is a subject the Portuguese authorities would rather did not get a mention! But on this road we see why they like their colleagues in Italy have tried to keep any banking bailout off the public books. The Euro area authorities have made Portugal have another go.

one of the main adjustments in the balance of Public Accounting corresponds to the item “other adjustments” that in 2014 includes € 6 186 million (3.6% of GDP) related to the recording of the financing operations of the State to the public enterprises “Carris” and “STCP”, to the write-off of nonperforming loans by BPN Crédito, held by Parvalorem, S.A. and to the capitalization of Novo Banco.

Well two goes in fact.

In conclusion, the Banif resolution operation determined an increase of the GG deficit in 2015 of € 2 463.2 million (1.4% of GDP),

Thus we see that like Italy with its bank bailout plan to be financed by the banks ( so that if the weakest fail they can take others with them?) Portugal has desperately tried to keep its banking crisis off the public books. This is also presumably why it has joined with Greece to rail against austerity. From France24.

We must have a new balance between funds allocated for servicing the debt, and funds allocated for investment and economic growth, job creation and convergence. (Portugal’s PM Costa).

Banco BPI

This is the second largest bank in Portugal and it has been up for sale for a while leading us to think that nobody wanted it. The first issue was its Portugal operations but as so often we see that Angola is involved and according to All Africa there is lots of trouble there too.

One of Portugal’s largest and most venerable banks, the Banco BPI could be brought to its knees, not through bankruptcy or similar problems, but because its operations in Angola would be hamstrung if they lose their link to the Banco de Fomento Angola (BFA)……..In the first six months of 2015, BFA operations made up 70% of BPI profits.

The tangled web includes this situation.

Step forward Isabel dos Santos, billionaire daughter of Angola’s President Jose Eduardo dos Santos.

As so often in the mix for Portuguese banks she is involved and AllAfrica puts it nicely.

In other circumstances, it might be quite deliciously ironic to see a post-colonial African entrepreneur – and a female to boot – take down a bank connected to the old boys’ club of Portugal’s well-heeled aristocracy (Santos Silva and Ulrich). In reality, it is much more complicated.

The new deal involves Caixabank becoming the largest shareholder and a company controlled by Isobel dos Santos being in control of the operations in Angola. Actually it cannot be healthy to have the daughter of the President of Angola pretty much owning the banking system there! But there has been something of a murky deal for Banco BPI for now. I say for now because banking solutions in Portugal have a way of later unraveling.

Also at a time of considering corruption and the Panama Papers I am reminded of this from the 21st of December.

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.

Novo Banco

The situation here is similar to this described by The Portugal News yesterday.

Novo Banco, which was created after the collapse of Banco Espírito Santo, has mistakenly made transfers of thousands of euros to former clients.

This is a bank whose short history defines the phrase accident prone. There is a particular irony in its name meaning new bank as those affected by the haircut imposed just before the turn of the year by the Bank of Portugal will no doubt be pointing out. After all it was badged as a clean bank only a few months before. The theme here is that changes in Euro area banking rules seem to send a few cockroaches scuttling for the shadows again. Anyway in spite of promises of compensation from the Bank of Portugal this is happening according to Bloomberg.

BlackRock Inc. is leading a group of Novo Banco SA bondholders suing the Bank of Portugal after the central bank decided to impose losses on their securities.

Oh and guess who was involved as Novo Banco was spun out of Banco Espirito Santo or BES? Yes Isabel….

According to Negocios this morning there will be a continued drag on the Portuguese economy.

As had been reported earlier, the institution still pursue a cost optimization plan, which provides for the closure of 170 branches and a reduction of about one thousand employees throughout the year.


This whole situation continues to rumble on. No doubt inspired by Euro area boasts ( French President Sarkozy) that the banking crisis was an “Anglo-Saxon” entity many Euro area nations overlooked their own banking problems. For Portugal there was the issue that before it got around to doing much about it the Euro area crisis then hit it like an Atlantic gale and by then it was in many ways too late. The problem of kicking that poor battered can into the future was that the future had a larger national debt combined with a smaller GDP.

Due to changes in Euro area banking rules Portugal is now being forced to make changes and as they happen I am reminded of Mario Draghi’s use of the word “resilient” for the Euro area banking system. A lid is kept on this to some extent by all  the monetary easing of the European Central Bank and its purchases of Portuguese Government bonds. This means that its ten-year bond yield at 3.55% is relatively high but also much lower than when it surged into the high teens as the Euro area storm raged. However the troubles mean that the banking system must be unable to support the economy properly as Coldplay warm up.

Oh, no, I see
A spider web, it’s tangled up with me,
And I lost my head,
The thought of all the stupid things I’d said,

Oh, no, what’s this?
A spider web, and I’m caught in the middle,
So I turned to run,
The thought of all the stupid things I’ve done,





15 thoughts on “Portugal has more trouble than it can handle with its banks

  1. Fascinating blog as usual. I know that you don’t do politics, but I do wonder whether those who took Portugal and Greece (and Italy) really understood that the consequences of being:
    1. Able to borrow at German rates an almost infinite amount of money;
    2. Unable to devalue/inflate your way out of trouble.
    In my opinion, these two factors have led to appalling problems and individual suffering in terms of unemployment, banking failures, emigration of talented people (see the figures today of immigration to the UK from southern Europe and think of the impact on the home countries of all these people leaving) and spiralling debt. Add to that German intransigence as to how to get out of this, IMF incompetence, and the mix is pretty toxic.

    • Good comment James.

      A lot of the best brains are getting out of the Med countries.Especially the young and mobile.Those left face some of the highest unemployment rates in the world.

      Lots of unemployed youngsters is,historically speaking,a bit of a combat indicator.

    • Hi James,

      I agree, but suggest immigration to stronger economies – Germany has seen a bigger influx from Greece, Portugal, Spain etc than the UK.

  2. The governments of Portugal and Spain will expect the worst if Britain votes to leave the EU. The knock on effect could be considerable which is why I do not expect any retaliatory actions from them (or the French, Germans etc) if we do leave – their economies need British tourists and trade with Britain.

    • Much as I’m hoping we do leave,I fear we won’t.

      But if we do,I think you’re absolutely right.

      Apparently,the 5th biggest Italian city in the world is London.Lots of French people here too..

      ……and obviously,our ethnic Dutch contingent!!!(although I’m 2nd generation)

  3. Shaun,
    Meanwhile over in the USA the FED has 2day closed door meetings interposed with Yellen seeing together POTUS & VP (security breach?) -bad news on the banks oil loans perhaps?

    • Hi Chris

      There has been a fair bit of speculation about this. It was badged as a meeting about the Discount Rate which does in the US have a bit of a life of its own. But the announcement seems to be along the lines of what you suggest.

      1. Bank Supervisory Matter.

      If it was about the 5 banks who failed the living will test well they wasted their time as nobody seems that bothered by it.

  4. Dear Banks

    you are not needed anymore , please go now and dont let the door hit you on the bum on the way out ….


    • I’ll bet they switch the lights off on the way out,finally exhibiting some thrift as they exit the building weighed down with their lucre

  5. ‘Portugal has more trouble than it can handle.’

    Thanks for expanding on the topic Shaun but if you had little time,then you could have made it short and sweet.

    To my mind,none of the Med countries banks have done anything other than hide the losses somewhere else on someone else’s balance sheet.

    I remember reading Mish Shedlock years ago and him citing reports that the Spanish bad bank had found that it had had hotel rooms with residential 100% mortgages dumped on it.

    • Hi Dutch

      In some ways if you consider all the assistance Portugal has received via the bailout, negative interest-rates and QE purchases of its bonds you might think it was sorted. But the truth is that the establishment there looks ever more corrupt which the banking scandals shine a light on and especially the dodgy to say the least links with the ruling family in Angola.

      The net result of a country that is so ridden with corruption is that it struggles to get any decent economic growth. A factor in that is of course the emigration of the young highlighted near me by some of Stockwell being called Little Portugal

  6. funny old world

    it seems after all these years that the Banks are still bust

    the PIIGS are still all bust

    and Germany apparently is still rich

    can the German tax payer bail the club med out again ?

    dunno , Shaun , dunno


    • Hi Forbin

      Yes and in the vein of your comment there was this today on the wires.

      “ESM’s Regling: Euro Area has more total fiscal space than the US and Japan, and they would have space in a real crisis”

      As the “fiscal space” is mostly the German budget surplus has anybody asked them? After all if they had been willing they would be running a deficit to help their neighbours. But added to your list is the fantasies of those running the show.

      “ESM ‏@ESM_Press
      #Regling: EU is perhaps the best possible working model for political and economic cooperation between independent democracies”

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