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.”
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.
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?