What Portugal did not need is a worsening of its banking crisis

Tonight Portugal plays Wales in the semi final of the European Championships and this will occupy much of the news. I have to confess I cannot wait! But for Portugal there is another story going on and it brings together two themes of my work. Firstly there is the underlying problem that it has struggled to achieve any real rate of economic growth for years and in fact for decades. Even in the relatively good times it has struggled to grow at more than 1% per annum and that effect has been exacerbated by the problems of the Euro area crisis which put it into a depression. The combination of a shrinking economy and the Euro area crisis has left it with a national debt of 129% of GDP (Gross Domestic Product).

Whilst Portugal has begun to climb out of the original Euro area crisis problem we see something familiar in its recent economic performance. Here is the trend for annual economic GDP growth from the first quarter of 2015. 1.7%, 1.5%, 1.4%, 1.3%, and then 0.9%. This is in a period of negative interest-rates, ever more QE and a lower Euro. If we throw in the beneficial effect of a lower oil price then such numbers are both disappointing and sadly consistent with past performance. Here is the view of the Bank of Portugal on this.

Nevertheless, low productivity growth reflects persisting structural weaknesses, as well as some negative consequences of the past few years’ adjustment process. The Portuguese economy continues to record a long-term trend of low potential growth, associated with the vulnerabilities in labour and product markets and in the quantity and quality of productive inputs.

It tries to be upbeat about Euro area membership and it is true there are “particularly favourable monetary conditions” right now but for a central bank to use the word “challenges” you know there are problems. That in their language is what Taylor Swift calls ” I knew you were trouble”. It too is worried about the apparent slow down.

However, economic activity showed signs of weakness in the second half of the year, as a result of a deceleration in business gross fixed capital formation (GFCF) and exports.

Portugal has managed a better export performance in recent times. On the other side are the ongong problems in the former colony Angola where there are still close links. It has just raised interest-rates to 16% and turned away an IMF bailout. There are also potential problems from the Brexit referendum should the lower value of the UK Pound £ mean fewer visitors and tourists from the UK. According to Dow Jones the Finance Minister thinks it cause problems.

“[Brexit] is a structural change that will have an impact in our economy,” Mr. Centeno told lawmakers in parliament. ” Let’s have no doubts about that.”

Portugal’s banks

These have been in the news in recent times as they have been struggling in spite of the fact that for the past couple of years or so Portugal has managed some economic growth. They are suffering because little was done about the problems in the weaker phase with a strategy looking similar to that applied by Italy which mostly involved hoping the issue would somehow disappear.

As to the state of play we get a signal from this which if you recall was introduced by the UK as an emergency measure only yesterday. From the Bank of Portugal.

decided that the countercyclical buffer rate to be in force in the 3rd quarter of 2016 will remain unchanged at 0 per cent of the total risk exposure amount.

The Bank of Portugal also tells us that the banks have continued to deleverage.

Banking system total assets maintained a gradual downward trend in the first quarter of 2016.

This means that total assets have dropped from 513 billion Euros in 2011 to 409 billion in the first quarter of 2016. Some of this has been caused by the bank resolution deals at BES and Banif for example but there have been genuine falls. Also credit quality has declined.

The credit-at-risk ratio increased slightly to 12.2% in 2016 Q1, explained equally by an increase in credit at risk and a decline in gross credit.

The speed at which credit impairments are being seen has slowed but the total has continued to rise. The overall position is shown below.

Banking system solvency ratios declined slightly in the first quarter of 2016 due to a decrease in own funds

Also whilst the banks have received a lot of help it is also true that they are being hurt by the -0.4% deposit rate imposed by the European Central Bank.

Although positive, the profitability of the banking system decreased in the first quarter of 2016 on a year-on-year basis, due mainly to a reduction in income from financial operations.

Novo Banco

If ever a bank has not lived up to its name then this one has to be high on the list. The new bank or Novo Banco turned out to be a case of misrepresentation. It was supposed to be clean fresh and new and a good bank constructed from the wreckage of Banco Espirito Santo. On this basis it was supposed to be sold but the sale was suspended last September and this emerged at the end of the year.

The nominal amount of the bonds retransferred to Banco Espírito Santo, S.A. totals 1,941 million euros and corresponds to a balance-sheet amount of 1,985 million euros.

Now if you were an owner of a bond in a clean bank you might well be troubled by it going to one which pretty much defines a bad bank. Even worse this happened just in time for the bail in procedure that was part of the changes involving the European banking system . So your bonds went from rather valuable to pretty much worthless. No wonder this went to the courts!

In spite of this being a shambles it is still something of a surprise that another effort was made to sell off Novo Banco just after the Brexit referendum. Just before that it tried to buy back some of its own bonds which posed the question as to why it had not done that back last December? Four bidders emerged although at what price? Anyway I think we can discount the alternative which would be to make a public offering of the shares! Although officially that is still on the table.

Caixa Geral de Depósitos

There has been trouble at this state owned bank with the European Commission so far undecided whether to approve the recapitalisation required by it. Portugal’s Politico pointed out that there has been a series of resignations driven by this. Apologies for the clunkiness of the translation.

And in a harsh language, refer to the Government the responsibility for response to uncertainty hovering for months over the largest bank in the system.

The newspaper also looked at the consequences of this.

The letter was sent in the morning, by e-mail, and is the culmination of a more than six months path marked by the deadlock over the future of the largest Portuguese bank, which since January is rudderless and without strategy. A situation that has undermined the image of CGD and generated an arm-rail deaf among current managers and the Government. The lack of clarity in governance is leading to the suspension of many decisions, especially in the area of credit.

As you can imagine the last sentence caught my eye. It no doubts contributes to this.

In May 2016, the annual rate of change (a.r.) of loans granted to non-financial corporations (NFC) was -2.5%, that compares with -2.7% from the previous month

Hardly supporting the wider economy is it? Also this is at a time when ECB policy is extremely expansionary. Perhaps the Portuguese banks are increasingly worried by this.

The overdue loans ratio for NFC increased 0.3 p.p., standing at 16.7%. The percentage of NFC with overdue loans increased 0.1 p.p., standing at 29.6%


Back on the 7th of June I put it like this.

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.

As we bring things up to date we see that in the meantime more problems have arisen. The general environment is that the Eurostoxx bank index has fallen from 125 to 78 in Europe so far which gives us a clue as the the likelihood of a public offer for Novo Banco and the likely price offers.

Meanwhile Portugal is in trouble with the European Commission over its fiscal deficit and whilst no sanctions have been declared there have been some consequences. From Publico.

It’s the first casualty of the railway investment plan that the Government presented in February. The Aveiro-Mangualde line, amounting to 675.3 million euros and it would have a share of 404.8 million of EU funds, was sunk by Brussels because the cost-benefit analysis was negative.

Remember the Roads To Nowhere in Portugal?





15 thoughts on “What Portugal did not need is a worsening of its banking crisis

  1. ” low productivity growth reflects persisting structural weaknesses” and a bombed-out property market reliant on foreign sales.

    Not just idle southern Europeans living off cheap debt then …..

    • Hi David

      It is a familiar reforms are always just around the corner but mostly never materialise. The Portuguese hoped that they could bypass their own establishment and use the European one but that too has let them down.

  2. One can only hope the Portugese players are today too worried about a “bail in” of their fat bank accounts, rather than considering how to contend with another sort of Bale!

    • Hi Andy Z

      Having just watched the game there was sadly no Bale in for Wales :(. With so many of their top players abroad I wonder where they do bank. Does CR7 bank in Spain and are any in Italy? Isn’t the young lad who looks a bit like the Predator off to Bayern Munich as my old employer Deutsche Bank looks none too hot either.

    • Hi Forbin

      Sadly version one has not come to pass as they have just beaten Wales. As to the second we can only hope as Portugal looks as though it is being sucked back into the bailout-austerity- depression cycle once again.

  3. Very interesting, as usual, Shaun.
    I am simply mystified as to how the Euro can be seen to benefit Portugal. How many years of no/low growth, high unemployment, do you need to conclude the experiment? It seems to me that the Euro has simply enabled Portugal to overextend itself by borrowing too much at government level, at the same time as removing the ability to recapitalise the banks or devaluing the currency.
    I am no economist, but surely the Greeks, Portuguese, Italians, Spanish would have had lower unemployment and deficits had they been outside the Euro?

    • It was a similar story in the days of the escudo for Portugal. The Euro just allowed them to act more irresponsibly re finance as they thought they were backstopped by the Euro and the support of the Eurozone underpinning the Euro, unfortunately, the Greeks and Italians had the same idea too and the EC et al didn’t bother enforcing the rules too much, which didn’t leave many EZ members to carry the burden.

      • Where would they get that idea from?

        Perhaps the same €-fanatics who encouraged Greece to cook the books in order to gain entry?

        • “the same €-fanatics who encouraged Greece to cook the books in order to gain entry?”

          Evidence please.

        • http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-mask-its-true-debt-a-676634.html


          “One time, gigantic military expenditures were left out…”

          Now, since Greece buys so much of its weaponry from Germany, the German Govt. would be aware that this expenditure was missing.
          “Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.
          Although Med countries bought them, they’d be on offer to all EU govts. ESPECIALLY GERMANY, WHICH WAS FIRST TO BREAK THE 3% RULE.

          Face it, everyone knew Greece couldn’t honestly qualify for €-membership, but it was then, as it is now, a political, rather than economic measure, and as many countries as possible were shoe-horned in.

        • Thanks for the reply and the link Therrawbuzzin. Prior to reading the article I had no view on whether the EZ had knowingly allowed Greece to join when it didn’t satisfy entry rules. The article you have supplied has raised more questions rather than providing a definitive answer, allow me to explain:

          The Der Spiegel article was written in 2010 with the benefit of hindsight just as Greece was being exposed. There are indications in the language used though :

          “Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought.” .

          The article is describing what Eurostat have found “now” in 2010 NOT in 2001.

          The article goes on to state:

          “This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer. ”

          So, the loans DIDN’T show up due to shortcomings in Eurostat’s own methodology.

          The ever changing deficit value will be due to currency movements on which the swaps deal were based – this is a kind of currency future which has been purchased by the Greeks. Funnily enough, as the swaps were made using US dollar, Swiss francs and Yen, all currencies which have been strengthening over the last few years this means that if these currencies were to weaken substantially against the Euro (unlikely) the value of the deficit in 2001 would have to be re calculated at current rates and the deficit may then disappear. When the time comes for repayment it maybe cheaper then anyone thinks if these currencies are going through a weak phase, but, if they are still strong it is likely they will be rolled over into the (better?) future, maybe in different currencies that are expected to weaken against he Euro – a form of can kicking – what a tangled web and all that.

          I would need to know substantially more about the military and hospital debt in terms of it’s composition (i.e. was it Private Finance Initiative type debt in which case it is not counted as Government debt) before I could form a valid view as to whether the EZ encouraged the Greeks to “cook the books”. Goldman Sachs just saw a way of helping Greece finance it’s debt in a way that Eurostat would not see, I doubt Goldman Sach’s had a view one way or the other on whether Greece should join the EZ.

          I agree the Euro, the EZ and the EU are a political construct and I’m not defending them, there is much that is wrong with them not least of which is the failure of the European Commission and ECB to effectively regulate the EZ countries and their Central Banks, although again, I doubt they would knowingly bend rules for admission, but once in there is a huge political pressure for the Project to “work” and grow. It is then that the EZ authorities would be likely to turn a blind eye as a country being ejected would be a sign of failure to a politicians mind.

          The problems of Greece, Italy and Portugal are of their own making, membership of the Euro has simply served to magnify those problems as it is too highly valued for the condition of their respective economies. The problem they now face is if they leave, the remaining EZ politicians spite will probably be huge as they will view it as sticking 2 fingers up at the project (as I fear they view the Brexit outcome) and will do, to coin phrase “whatever is necessary” including barring membership of the EEA or EU and relying on onerous default WTO tariffs to ensure the respective economies fail, thereby driving their borrowing costs up, showing to the world what happens if you leave the EZ. Whilst they remain in the EZ they continue to have free trade within the EZ, EEA and EU block and with another 60 countries too, plus they can run to the ECB for Public funds regardless of EZ rules (one of the things wrong with the EZ imo). Britain leaves and the EU says “so what” Greece and Portugal ditto but Italy is the big one because it’s so interconnected and so big. Likely if Italy goes it will take the EZ with it and the pollies probably know that so play a game of bluff.

          It should not be forgotten that there is much more that is wrong with the UK establishment and here I’m thinking of erosion of workers and consumer rights along with the usual blundering on Public Finances and failure to redistribute wealth throughout society (and I say that as someone who would find he had a lot of his wealth “redistributed” if the establishment ever got round to it!!)

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