It was only on Friday that I found myself analysing again the problems and travails of the Italian banking system and this morning we find that its Euro area twin the Portuguese banking system is in further trouble as well. Mind you according to Italy’s Finance Minister Padoan there is no problem at all.
Italian finance minister rejects need for banks bail-in……Pier Carlo Padoan, the Italian finance minister, has denied that Italy’s banks are suffering from systemic problems and rejected a “bail-in” of private investors.
Apparently though there are “a few “contained” critical cases.” As we mull the record of official denials of banking problems we can only wonder how large a number “few”can be and does he mean contained like at Fukushima?
In a familiar tale share trading in Monte Paschi was stopped this morning in Milan as it fell another 5%.
The Portuguese Banks
Let me repeat a summary I used on June 7th and July 6th.
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.
The Portuguese statistics office in its review of 30 years of European Union membership puts it like this.
The second subperiod, from 2001 to date (2014), was marked, by contrast, by an almost stagnant Portuguese economy, while the EU15 and the EU28 on average experienced economic growth (average annual growth rates slightly above 1.0%)……….. In other words, the conditions for this small open economy trying to find its place in the new international environment became much more unfavourable, with the additional aggravating circumstance of having to meet the fiscal targets set out within a financial rescue programme.
Not much of a recommendation of the decision to join the Euro is it? The previous period has been more successful. But the “almost stagnant Portuguese economy” of this century has meant that the banks have got weaker and in fact the economy and the banks have dragged each other lower.
For those unfamiliar with Portugal there has been the issue also of unfavourable demographics which have been made worse by this.
However, the crude rate of net migration has been following a negative trend since 2011, as was already the case with the crude rate of natural increase.
Let us remind ourselves that this was supposed to be as it name implies as good bank or literally new bank. Back on August 3rd 2014 the Bank of Portugal told us this.
Under Article 153-B of the RGICSF, the Resolution Fund will solely own the equity of the new bank, and will later allow new capital to enter, reestablishing a shareholder base for this bank with the inherent reimbursement of the capital now provided by the fund.
Ah “allow new capital to enter!” Well nearly two years and several abortive attempts later there has been not a penny or cent of new capital but there was this last New 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.
So the new clean bank turned out to be not so clean which I would imagine explains the shortage of buyers for the equity. This rather leaves the Resolution Fund holding a very expensive baby.
The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.
What is the make-up of the fund?
The Resolution Fund’s sources of funding are the contributions paid by its member institutions and the proceeds from the levy over the banking sector, which, according to applicable regulations, are collected without jeopardising the solvency ratios.
Why is this a good idea?
The State will bear no costs related to this operation.
Given that the Resolution Fund started its operation only in 2012 and has not available sufficient financial resources to finance the resolution measure applied to Banco Espírito Santo, S.A., the Fund took out a loan from the Portuguese State. The loan granted by the State to the Resolution Fund will be temporary
Eurostat took a somewhat different view.
“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.
The other banks
In theory they now hold Novo Banco via the Resolution Fund albeit that it had nowhere near the money to pay for it. According to the Financial Times this morning that is not going so well.
Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break-up or liquidation.
Has a “good bank” ever destroyed money and capital so quickly? This is a flaw of collective banking insurance which I have pointed out many, many times and here is the present consequence.
Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo.
Caixa Geral de Depósitos
Back on the 6th of July I pointed out that there seemed to be a flurry of departures from the board and that trouble was building. Today the FT puts it like this.
Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state-owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn.
If we wished to copy the Beatles and set about “fixing a hole” what might it cost?
In a recent report, Barclays estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was bringing the country under “close market scrutiny”.
Portugal is far from alone in seeing the share prices and values of its banks fall in 2016. However there are specific problems here based on the Portuguese system and the way that it has tried to play the parlour game “pass the parcel” without the music ever stopping. If we look back a corrupt banking system with links to Angola has lived through 15 years of overall economic stagnation which of course it has contributed to. There is a growing list of problems which the Portguese state has looked away from.
However as time has progressed it has successively been forced to face up to them one by one. Usually not by itself as it has invariably used accountancy chicanery to avoid that but after a period Eurostat catches up with it. This means that its deficit problems ( 12.4 billion Euros in 2014 , 7.9 billion in 2015) have continued which have meant that the national debt (129% of GDP) has grown too. The can has been kicked not into a future full of sunshine but one with more clouds and rain. More Euro area punishment for breaking the fiscal rules is of course part of that.
In current conditions a rising national debt means much less than it did simply because Mario Draghi and the ECB are hoovering up so much of it So far the purchase of 19.1 billion Euros of Portuguese government debt has meant that it can continue to borrow relatively cheaply ( ten-year yield 3.06%). But as to repaying any of it well that looks ever further away and without ECB support then Portugal looks on its way to insolvency unless it can finally find some sustained economic growth. A great shame for what is a lovely country.