In one way Portuguese life is doing fine as Christiano Ronaldo or CR7 starts training with its European Championships football squad. However even in this area there is a worrying sign as I note that the Vampire Squid cannot spell what it calls Portual. Worrying from the organisation which gets the nearest to ruling the world of anyone. Although with all the money in football these days it is hardly a surprise that Goldman Sachs wants to get its blood funnel into it.
Meanwhile there are signs of trouble in Portuguese economic life. It was only yesterday that I was discussing low and negative government bond yields quoted a country which has many economic similarities Italy. This morning has thrown up another example of a yield free world as Toyota has according to Faz issued a corporate bond yielding 0.001%. Makes you wonder why they bothered with any yield at all really doesn’t it? However this is not the state of play in Portugal. From Bloomberg.
Just when Portugal thought things couldn’t look any worse for its bond market, they did….After a rally in Greek debt in recent weeks, the country is the only part of the euro region to lose money for investors this year.
The ten-year bond yield is 3.17% which gives us two perspectives. Firstly it is much better than the push into the high teens at the peak of the bond crisis. But secondly it is much higher than its peers in the QE (Quantitative Easing) program of the ECB. Rather than looking at Greece the benchmark here is of course Germany.
The difference, or spread, between Portugal and Germany has widened about 90 basis points since the start of 2015 to three percentage points,
This is large in relative terms although perhaps markets have spotted this from Reuters.
With at least 10 months left of its quantitative easing programme, the ECB is also nearing a limit of holding a third of Irish and Portuguese debt, since it bought large amounts under previous crisis-fighting measures.
Troubling although of course we are already wondering if this is what ECB President Mario Draghi was referring too when he told us there were “no limits”. As of the end of May some 17.7 billion Euros of Portuguese government bonds had been purchased including some 1.45 billion in May.
Back on the 13th of April I looked at the problems that Portugal had with its banking sector. One of them was the problem created by having the daughter of the President of Angola being such a large shareholder of Banco BPI. This was the view of anti-corruption crusaders last 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.
The official view was that the situation would soon be over which would solve Banco BPI’s problems with its exposure to Angola whereas we find in reality that the problem is ongoing. This is a familiar theme in Portugal as those who have followed my updates on the Novo Banco saga will be aware. Success is declared but nothing really changes and even the “New Bank” turned out to be rather like an old bad bank.
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.
This is the largest private bank in Portugal and in recent times it does not seem to be sharing in the equity market rallies. From @WEAYL.
Portuguese bank BCP has now lost 33% of its value over last 8 sessions.
We know a company is in trouble when short selling is banned by the regulator and that happened last Thursday and yesterday. Oh and yes there is the usual Angolan link as it owns 18% of BCP. There have been problems with its online bank which it is now apparently keeping (as of yesterday) and those who subscribed to the capital issue of 388 million Euros on June 11th last year are probably wondering if it was good money after bad. In late 2014 it even failed a banking stress test which is quite an achievement of the negative kind when we consider the crocks which have passed with flying colours!
Last December the Financial Times did some cheerleading for BCP.
Nuno Amado, chief executive of Millennium BCP, Portugal’s largest listed bank, had a noticeable spring in his step when he strode out to deliver the lender’s latest results in November.
Why was this?
Domestic operations were no longer cancelling out the performance of more dynamic overseas markets such as oil-rich Angola.
Ah Angola! What could go wrong?
Or indeed for Portugal’s banks? The FT again.
Profits beckon for Portugal’s banks
Yesterday in an interesting piece of timing it published a working paper on what happens if the banking sector in Portugal hits trouble. I wonder why?
we show that credit supply shocks have a strong impact on firm-level investment in the Portuguese economy over and above aggregate demand conditions and firm-specific investment opportunities…… larger banks in Portugal were particularly hard hit by idiosyncratic shocks in the last decade.
Whilst the problem begins in larger banks it peaks in an entirely different sector.
Small firms are found to be much more vulnerable to the adverse impact of bank shocks on investment.
So we have a mechanism which explains at least in part why the economic performance of Portugal has been so poor. What I mean by this is that if we look back we see that even in the good times annual economic growth rarely gets above 1% for long.
Bank of Portugal
Which the official view is that the banking sector is fine we see in the detail of the financial stability report signs of trouble.
In the Portuguese case, this deterioration is amplified by the vulnerability of national credit institutions, especially low profitability, the quality of the balance sheet assets, and capital ratios.
That pretty much covers what can go wrong in banking does it not? Or perhaps not is we look at the future.
Against a background of low profitability, reduced interest rates and high levels of credit at risk, it is crucial to strengthen the incentives to reduce the stock of credit at risk and other non-income-generating assets in banks’ balance sheets.
So more deleveraging and contraction are ahead which returns us to the ECB working paper above. Oh and whoever has been selling bonds to the ECB it does not appear to have been the banks.
The increase in bank exposure to public debt securities during the economic and financial crisis has not been materially reversed,
Portugal gives us an insight into the relationship between the banking sector and the economy of the nation. Sadly it is not a good one as we go through a checklist of what could go wrong. A concentrated banking sector with strong links to the Portuguese establishment and many links to Angola has failed to provide investment for the economy in the good times and led to contraction in the bad times. Whenever the light of media attention is shown on the sector we see cockroaches scuttling for cover. Putting it another way this is the reality of the theory of money velocity falling.
Meanwhile the underlying economy continues to struggle. This should be a strong phase for Portugal as the impact of a lower Euro combined with lower oil prices and ECB “no limits” easing should have arrived. Yet as Bloomberg reports.
The Portuguese economy expanded 0.9 percent in the first quarter from a year earlier, the slowest pace of annual growth since the fourth quarter of 2014.
The promises of reform by the Troika seem to have turned to verses by China Crisis.
And if I wish to comfort the fall
It’s just wishful thinking