Can the Portuguese economy rely on the Lisbon house price boom?

It is time to head south again and touch base with what is happening in sunny Portugal. In the short-term the UK weather may be competitive but of course in general Portugal wins hands down which is why so many holidaymakers do their bit and indeed best for retail sales and the tourism industry over there. No doubt they helped cushion things when the economy was hit by the double whammy of the credit crunch followed by the Euro area crisis but now the Bank of Portugal was able to report his in its May Bulletin.

In 2017 GDP grew by 2.7%, in real terms, after increasing by 1.6% in the previous year.

This is significant on several levels. The most basic is that growth is happening. Next comes the fact that for Portugal this is a performance quite a bit above par. This is because as regular readers will be aware the background is of an economy that has struggled to maintain economic growth above 1% per annum. It is also means that the statement below has been rather rare.

In Portugal, GDP growth stood close to the
euro area average.

Accordingly the nuance is a type of statement of triumph as not only has Portugal seen absolute economic problems it has been in relative decline. Tucked away in the detail was good news for issues which have plagued the Portuguese economy.

The factors behind the acceleration of the Portuguese economy in 2017 were exports and
investment. This composition of growth is particularly important in correcting a number of
structural problems persisting in the Portuguese economy. The strong performance of Portuguese
exports mostly resulted from a recovery in the pace of growth of external demand for Portuguese
goods and services, in particular from euro area partners.

So the “Euroboom” helped and one part of the story allows the central bank to do a bit of cheerleading.

These developments have a structural dimension, including the closure of firms which are more oriented towards the domestic market and the establishment
and expansion of new firms that export higher value-added goods and are oriented towards more diversified geographical markets than in the past.

However us Brits may well have done our bit for something which is also going well.

In 2017 the market share gain of Portuguese exports was also associated with extraordinary growth in tourism exports. The dynamism observed in the tourism sector in Portugal exceeds that of a number of competing
countries, namely the other countries in Southern Europe.

This issue matters because Portugal has in recent decades been something of a serial offender in terms of finding itself in the hands of the IMF ( International Monetary Fund). A familiar tale of austerity and cut backs then follows which is one of the causes of its economic malaise. The May Bulletin implicitly confirms this.

Bringing the GDP per worker in Portugal closer to the average of European Union (EU) countries is a particularly important challenge for the Portuguese economy.

Indeed and tucked away in the better news on investment is something of a warning.

Construction benefited from favourable financing conditions, an increase in demand from
non-residents and strong growth in tourism and related real estate activities……….This is particularly relevant for an economy such as Portugal, where housing has
a very high share of the capital stock and the level of capital per worker is low compared with
the other European countries.

This brings us to the background of Portugal being a low wage, low productivity and low growth economy. An issue is this way it leads this European league table.

In 2015, Portugal was the country with the largest weight of construction in the stock of fixed
assets, with 91.7% (41.5% associated with dwellings and 50.2% associated with other buildings
and structures)


The better economic situation has led to welcome developments in this area as you might expect. From Portugal Statistics on Friday.

The April 2018 unemployment rate was 7.2%, down 0.3 percentage points (p.p.) from the previous month’s level,
0.7 p.p. from three months before and 2.3 p.p. from the same month of 2017.

This area has been a particular positive as the unemployment rate has gone from a Euro area laggard to one improving the overall average. Whilst in Anglo-saxon and Germanic terms it still looks high for Portugal it is an achievement.

only going back to November 2002 it is
possible to find a rate lower than that.

On a deeper level we learn something from the employment trends. For newer readers in the credit crunch era rises in employment have become a leading indicator for an economy. Looked at like this then there was a change in the summer of 2013 and since then an extra half a million or so Portuguese have found work. Returning to economic theory this is a change as it used to be considered a lagging indicator whereas now we often see it being a leading one.

House Prices

The Bank of Portugal will be pleased to see this and will have its claims of wealth effects ready.

In the first quarter of 2018, the House Price Index (HPI) rose 12.2% in relation to the same quarter of the previous
year, 1.7 percentage points (p.p.) more than in the fourth quarter of 2017. This was the fifth consecutive quarter in
which dwelling prices accelerated

Perhaps this is what they meant by this.

Monetary and financial conditions contributed to this economic momentum, with the ECB’s monetary policy remaining accommodative.

A couple of areas stand out according to Reuters.

The National Statistics Institute said house prices in the Lisbon area rose 18.1 percent in the fourth quarter from a year earlier to an average of 1,262 euros per square meter. In Porto house prices rose 17.6 percent.

So Portugal now has the capital city house price disease. Just under half of recent turnover in houses by value has been in Lisbon. Yet the ordinary first-time buyer is seeing prices move out of reach.


The new better phase for Portugal is very welcome for what is a delightful country. But beneath the surface there are familiar issues. Let me start with an area that should be benefiting from the house price boom which is the banks.

Nevertheless, NPLs remain at high levels, in turn, weighing on banks’ profitability, funding and capital costs. High NPLs also hinder a more efficient allocation of resources in the corporate sector and thus weaken potential growth.

You may note that the European Central Bank prioritises the banks over the corporate sector as it reminds us that non performing loans remain an issue. Also there is the ongoing problem on how the new  bank Novo Banco went from being perceived as clean to dirty like it was a diesel.

The FT’s Rob Smith has a story today on the latest complication. Novo Banco is planning to push ahead with its bond sale, which involves tendering outstanding senior bonds, despite a new legal challenge from a London-based hedge fund, which argues that it has actually already defaulted on its senior debt. ( FT Aplhaville).

Also there is this pointed out by @WEAYL around ten days ago.

CGD, BCP and Novo Banco lent 100 million to the venture capital company ECS at the end of 2017. The next day they received the same amount in a distribution of the fund’s capital managed by ECS. (Economic Online)

Next comes the issue of demographics of which I get a reminder whenever I go to Stockwell or little Portugal.

The resident population in Portugal at 31 December 2017 was estimated at 10,291,027 persons (18,546 fewer than in
2016). This results in a negative crude rate of total population change of -0.18%, maintaining the trend of population decline, despite its attenuation in comparison to recent years.

Even worse the departed are usually the young, healthy and educated.

Should the trade wars get worse, then there will be an issue for the car industry as it is around 4% of economic output and has been doing well.


Portugal hopes to end its lost decade later this year

It is time for us once again to head south and take a look at what is going on in the Portuguese economy? The opening salvo is that 2017 was the best year seen for some time. From Portugal Statistics.

In 2017, the Portuguese Gross Domestic Product (GDP) increased by 2.7% in real terms, 1.1 percentage points higher than the rate of change registered in 2016, reaching, in nominal terms, around 193 billion euros. In nominal terms, GDP increased 4.1% (3.2 in 2016),

So both economic growth and an acceleration in it from 2016. In essence the performance was an internal thing.

The contribution of domestic demand to GDP growth increased to 2.9 percentage points (1.6 percentage points in 2016), mainly due to the acceleration of Investment. Net external demand registered a negative contribution of 0.2 percentage points (null in 2016),  with Imports of Goods and Services accelerating slightly more intensely than Exports of Goods and Services.

It is hard not to feel a slight chill down the spine at the latter section as it has led Portugal to go cap in hand to the IMF ( International Monetary Fund) somewhat regularly over the past decades. But to be fair the last quarter was better on this front.

The contribution of net external demand to GDP quarter-on-quarter growth rate shifted from negative to positive, due to the significantly higher acceleration of Exports of Goods and Services than of Imports of Goods and Services.

Indeed the last quarter was good all round.

Comparing with the previous quarter, GDP increased by
0.7% in real terms.

Also whilst it fell from the heady peaks of earlier in the year investment had a good year.

Investment, when compared with the same quarter of
2016, increased by 5.9% in volume in the last quarter of
2017, a 4.4 percentage points deceleration from the
previous quarter.

This was particularly welcome as it needed it as I pointed out on the 6th of July last year the economic depression Portugal has been through saw investment collapse.

 A fair proportion of this is the fall in investment because whilst it has grown by 5.5% over the past year the level in the latest quarter of 7.7 billion Euros was still a long way below the 10.9 billion Euros of the second quarter of 2008.


The national accounts brought a hopeful sign on this front too.

In the fourth quarter of 2017, seasonally adjusted
employment registered a year-on-year rate of change of
3.2%, (3.1% in the previous quarter)

Of course this does not have to mean unemployment fell but in this instance as we learnt at the end of last month the news is good.

The December 2017 unemployment rate was 8.0%, down by 0.1 percentage points (p.p.) from the previous month’s
level, by 0.5 p.p. from three months before and by 2.2% from the same month of 2016…………The provisional unemployment rate estimate for January 2018 was 7.9%.

This means that the statistics office was able to point this out.

only going back to July 2004 it
is possible to find a rate lower than that.

The one area that continues to be an issue is this one.

The youth unemployment rate stood at 22.2% and
remained unchanged from the month before,

Is Portugal ending up with something of a core youth unemployment problem?

The latest Eurostat handbook raises another issue as it has a map of employment rate changes from 2006 to 2016. For Portugal this was a lost decade in this sense as in all areas apart from Lisbon (+1.1%) it fell from between 2.5% and 3,8%. Rather curiously if we divert across the border to a country now considered an economic success Spain it fell in all regions including by 7.2% in Andalucia. So whilst both countries will have improved in 2017 we get a hint of a size of the combined credit crunch and Euro area crises.

Is Portugal’s Lost Decade Over?

No it still has a little way to go and the emphasis below is mine. From the Bank of Portugal economic review.

economic activity will maintain
a growth profile over the projection horizon,
albeit at a gradually slower pace (2.3%, 1.9%
and 1.7% in 2018, 2019 and 2020 respectively)
. At the end of the projection horizon,
GDP will stand approximately 4% above the level
seen prior to the international financial crisis.

So it will be back to the pre credit crunch peak around the autumn. We will have to see as the Bank of Portugal got 2016 wrong as I was already pointing out last July that the first half of 2016 had the economic growth it thought would arrive in the whole year. Maybe its troubles like so many establishment around the world is the way it is wedded to something which keeps failing.

Projected growth rates are above the average
estimates of potential growth of the Portuguese
economy and will translate into a positive output
gap in coming years.

Actually that sentence begs some other questions so let me add for newer readers that the economic history of Portugal is that it struggles to grow at more than 1% per annum on any sustained basis. In fact compared to its peers in the Euro area 2017 was a rare year as this below shows.

interrupting a long period of negative annual
average differentials observed from 2000
to 2016 (only excluding 2009).

This is unlikely to be helped by this where like in so many countries we see good news with a not so good kicker.

The employment growth in the most recent
years, which was fast when compared with activity
growth, has resulted in a decline in labour
productivity since 2014, a trend that will continue
into 2017. ( I presume they mean 2018).

House Prices

It would appear that there is indeed something going on here. From Portugal Statistics.

In the third quarter of 2017, the House Price Index (HPI) increased 10.4% in relation to the same period of 2016 (8.0% in the previous quarter). This rate of change, the highest ever recorded for the series starting in 2009, was essentially determined by the price behaviour of existing dwellings, which increased 11.5% in relation to the same quarter of 2016………….The HPI increased 3.5% between the second and third quarters of 2017

The peak of this was highlighted by The Portugal News last November.

Portugal’s most expensive neighbourhood is, perhaps unsurprisingly, the heart of Lisbon, where buying a house along the Avenida da Liberdade or Marquês de Pombal costs around €3,294 per square metre; up 46.1 percent in 12 months.

Time for the Outhere Brothers again.

I say boom boom boom let me hear u say wayo
I say boom boom boom now everybody say wayo

The banks

Finally some good news for the troubled Portuguese banking sector as their assets ( mortgages) will start to look much better as house prices rise. If we look at Novo Banco this may help with what Moodys calls a “very large stock of problematic assets” which the Portuguese taxpayer is helping with a recapitalisation of  3.9 billion Euros. Yet there are still problems as this from the Financial Times highlights.

Portuguese authorities last year launched a criminal investigation into the sale of €64m of Novo Banco bonds by a Portuguese insurance firm to Pimco that occurred at the end of 2015. A week later, the value of the bonds sold to Pimco were in effect wiped out by the country’s central bank.

This is an issue that brings no credit to Portugal as Novo Banco as the name implies was supposed to be a clean bank that was supposed to be sold off quickly.


So we have welcome economic news but as ever in line with economics being described as the “dismal science” we move to asking can it last? On that subject we need to note that an official interest-rate which is -0.4% and ongoing QE is worry some. Also Portugal receives quite a direct boost in its public finances from the QE as the flow of 489 million Euros  of purchases of its government bonds in February meaning the total is now over 32 billion means it has a ten-year yield of under 2%. Not bad when you have a national debt to GDP ratio of 126.2%.

To the question what happens when the stimulus stops? We find ourselves mulling the way that Portugal has under performed its Euro area peers or its demographics which were already poor before some of its educated youth departed in response to the lost decade as this from the Bank of Portugal makes clear.

The population’s ageing trend partly results from
the sharp decrease in fertility in the 1970s and

So whilst some may claim this as a triumph for the “internal competitiveness” or don’t leave the Euro model 2017 was in fact only a tactical victory albeit a welcome one in a long campaign. Should some of the recent relative monetary and consumer confidence weakness persist we could see a slowing of Euro area economic growth in the summer/autumn just as the ECB is supposed to be ending its QE program and considering ending negative interest-rates. How would that work?





The Novo Banco saga has been one of misrepresentation and woe

Yesterday saw an announcement from the Bank of Portugal on a saga which has run and run and run.

Banco de Portugal and the Resolution Fund concluded today the sale of Novo Banco to Lone Star, with an injection by the new shareholder of €750 million, which will be followed by a further injection of €250 million to be delivered by the end of 2017.

Indeed there is an element of triumphalism and back-slapping.

The conclusion of this operation brings to a close a complex negotiation process with the new shareholder, European institutions and other domestic institutions, in close cooperation with the Government.
The completion of the sale announced on 31 March brings about a very significant increase in the share capital of Novo Banco and terminates the bank’s bridge bank status that has applied since its setting up.

The opening issue is why this New Bank which is what Novo Banco, means that was supposed to be clean, needs an increase in capital? Let us look deeper.

As of this date, Novo Banco will be held by Lone Star and the Resolution Fund, which will hold 75% and 25% of the share capital respectively. It will be endowed with the necessary means for the implementation of a plan ensuring that the bank will continue to play its key role in the financing of the Portuguese economy.

The story gets a twist as we see that Lone Star will be walking away with 75% of Novo Banco and in return the Portuguese taxpayer does not get one single Euro. The implication is that the Resolution Fund is keen to get it off its books at almost any price.

Step Back In Time

If we follow the advice of Kylie Minogue we can go back to August 2014 when the Bank of Portugal was dealing with this.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets. Deposits are fully preserved, as well as all unsubordinated bonds.

BES had collapsed and I note again that Novo Banco was supposed to be clean of problem assets. However it did not take long for what Taylor Swift would call “trouble, trouble, trouble” to emerge as a rather unpleasant Christmas present arrived a few months later for bondholders. From my article on the 4th of April.

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………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

So just under 2 billion Euros was required to steady the ship of our “clean” bank and you can see why no one was in a rush to buy it!

Money Money Money

If we go back to the origination of this there was a bold statement from the Bank of Portugal.

This means that this operation does not involve any costs for public funds.

However there was this.

The State will bear no costs related to this operation. The equity capital of Novo Banco, to the amount of €4.9 billion, is fully underwritten by the Resolution Fund.

Ah good so the banking sector was paying up.

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.

Meanwhile if we rejoin the real world that is the same Portuguese banking sector that was in severe disarray so the money had to be found from elsewhere.

the Fund took out a loan from the Portuguese State. The loan granted by the State to the Resolution Fund will be temporary and replaceable by loans granted by credit institutions.

At this point it sounds rather like the Amigo loans advertised in the UK where you can borrow the money but somebody else has to guarantee it, in this case the Portuguese taxpayer. Also if this were an episode of Star Trek the USS Enterprise would be on yellow alert at the use of the word “temporary”. If we step forwards to just over a year ago the Resolution Fund told us this.

the conditions of the
loan of €3 900 million extended to the Fund in August 2014

which are?

Currently, the maturity date of said loan is 31 December 2017. The review that has now been
agreed upon will allow the extension of that maturity date in a way that ensures the capacity of
the Resolution Fund to meet in full its obligations through its regular revenue, and regardless of
the positive or negative contingencies to which the Resolution Fund is exposed.

Ah so it is To Infinity! And Beyond?! Oh and the temerity of the idea that the banks might have to back the er banking sector resolution fund.

without the need to raise any special contributions.

Number Crunching

Here is Reuters from September 2015.

“Once more, I repeat, there is no direct impact (on taxpayers), since the Portuguese state did not nationalise the bank nor take a direct stake in Novo Banco’s capital,” minister and government spokesman Luis Marques Guedes said.

Okay that is clear so let us look at the view from Europe’s statistics agency Eurostat a mere one month later.

 The second most significant impact to the deficit in 2014 was in Portugal (3.0pp of GDP) and it was also mainly due to a bank recapitalisation……. The recapitalization of Novo Banco. In the third quarter of 2014, the Portuguese Resolution Fund injected 4.9 bn euro (2.8% of GDP) into Novo Banco. As the sale of Novo Banco did not occur within one year after the capitalisation, the capital injection has impacted the deficit of Portugal in 2014 for its full amount.


Let us consider this in terms of the two main variables which are time and money. The time element is that the new clean bank was supposed be sold quickly whereas it took more than three years. The money element is that the Resolution Fund underwrote the bank capital to the tune of 4.9 billion Euros. There was then a swerve to get just under 2 billion Euros off some bondholders as the word clean somehow meant dirty, Now we see that where 100%= 4.9 billion back then now 75% = 1 billion as we note the value destruction leaving the Resolution Fund with its 25% apparently worth 0.333 billion Euros but backed by a loan of 3.9 billion Euros.

So quite a large gamble has been taken by the Portuguese authorities with taxpayers money whereas if things go well Lone Star has been able to get assets very cheaply. It has 75% of the capital after only paying around 20% of the total Of course should it go wrong then we can refer back to my timeline for a banking collapse. We had this back in autumn 2014.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

And at some date in the future ( like when Eurostat rules on this for example) we are likely to see this.

It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

Me on Core Finance TV


The ongoing disaster that is Novo Banco of Portugal

A constant theme of this website is an ongoing consequence of the credit crunch where more than a few banks have not been reformed and are still damaged goods. They are banks which were somewhat presciently sung about by the Cranberries.

Zombie, zombie, zombie

Certainly in that list was Banco Espirito Santo of Portugal which found itself in a spider’s web of corruption and bad loans. This led to this being announced by the Bank of Portugal in August 2014.

The Board of Directors of Banco de Portugal has decided on 3 August 2014 to apply a resolution measure to Banco Espírito Santo, S.A.. The general activity and assets of Banco Espírito Santo, S.A. are transferred, immediately and definitively, to Novo Banco, which is duly capitalised and clean of problem assets.

The point of this was supposed to be that Novo Banco would then be like its name, a New Bank. It would be clean of the past problems and would then thrive and the bad bank elements would be removed. Reuters took up the story.

Novo Banco, or New Bank – will be recapitalised to the tune of 4.9 billion euros by a special bank resolution fund created in 2012. The Portuguese state will lend the fund 4.4 billion euros.

At the time there were various issues as Portugal itself had only recently departed an IMF bailout so was not keen to explicitly bailout BES. Thus the bank resolution fund was used except of course it had nowhere near enough money so the state lent it most of it. These sort of Special Purpose vehicles are invariably employed to try to keep the debt out of the national debt. To be fair to Eurostat that usually does not work but left an awkward situation going forwards where in theory the other Portuguese banks created Novo Banco but in reality the Portuguese taxpayer provided most of the cash.

Novo Banco

As regular readers will be aware investors in Novo Banco later discovered that the word “clean” was a relative and not an absolute term.

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………This measure has a positive impact, in net terms, on the equity of Novo Banco of approximately 1,985 million euros.

This may have happened just after Christmas 2015 but there was no present here for the holders of these bonds who found them worth zero. To say that institutional investors were unhappy would be an understatement and I will return to this later but for now I just wish to point out that the bill is escalating and also how can a clean new bank have to do this?

The sale of Novo Banco

There were various efforts to sell Novo Banco which went nowhere and of course trust in the Bank of Portugal was damaged by what happened above which added to the misrepresentations issued by it as BES declined. Just over a year ago it published this.

Banco de Portugal has defined the terms of the new sale process of Novo Banco, following the re-launch announced on 15 January 2016.

This January the Lex Column of the Financial Times pointed out why buyers have been in short supply.

Available for purchase: one crippled bank suffering from poor credit quality and high costs. Location: Portugal. Important information: Potential for future damages arising from litigious creditors. The sale prospectus for Novo Banco does not look enticing.

It gets worse.

Quarterly losses since Novo’s creation have averaged €250m. A quarter of all loans are delinquent or “at risk” of being so.

Again we are left wondering exactly how the Bank of Portugal defines the word “clean”?! But whilst the FT thought there were bidders it looks to me that the only player was the appropriately named Lone Star.

Lone Star

What happened late on Friday was summarised by Patricia Kowsman of the Wall Street Journal.

Dallas-based Lone Star will inject €1 billion ($1.07 billion) in Novo Banco for a 75% stake, while a resolution fund supported by the system’s banks will hold the remainder. The setup could ultimately leave Portuguese taxpayers exposed to losses, which is what the country’s central bank had tried to avoid when it imposed a resolution on the lender almost three years ago.

Actually they are only paying 750 million Euros up front with the rest by 2020. But as we number crunch this there are a lot of problems.

  1. The nearly 2 billion Euros of bonds written off do not seem to have made the situation much better.
  2. The Portuguese Resolution Fund put in 4.9 billion Euros for a bank which is now apparently worth 1 and 1/3 billion.

The Resolution Fund took steps last September to cover this.

the maturity date of the loan will be adjusted so as to ensure that it will not be necessary to raise special contributions,

I would like to take you back to August 2014 when it told us this.

Therefore this operation will eventually involve no costs for public funds………..This applies even in exceptional cases, such as this one, in which the State is called upon to provide temporary financial support to the Resolution Fund, as that support will later be repaid (and remunerated through payment of interest) by the Fund.

The use of the word “temporary” was a warning as its official use is invariably the complete opposite of that to be found in a dictionary. Also I am reminded of my time line for a banking collapse.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

Back in August 2014 we were told this. From Reuters.

“The plan carries no risk to public finances or taxpayers,” Carlos Costa, the central bank governor, told reporters in a late night news conference in Lisbon.


You might think that things could not get much worse. Yet apparently they continue to do so. From Reuters.

Blackrock and other asset management institutions are seeking an injunction this week to block the sale of Portugal’s Novo Banco to U.S. private equity firm Lone Star.

Okay why?

The bond transfer had caused losses of about 1.5 billion for ordinary retail investors and pensioners


A critique of the banking bailouts has been the phrase “privatisation of profits and socialisation of losses ” and we see this at play here. Whilst there is a veil of a Special Purpose Vehicle ( the Resolution Fund) the Portuguese taxpayer has had to borrow money to back most of it. It is plain that we were not told the truth or anything remotely like the truth when a “clean” bank was created. As no cash at all has been returned from the sale of Novo Banco – the funds are to boost bank capital – they are left hoping that one day the money will be repaid except they have been diluted by a factor of four.

Let us take a happy scenario where Novo Banco now does well the majority of the gains will go to Lone Star and a minority to the Resolution Fund. So the minor stakeholder gets the majority of the returns? Oh and even worse the Fund is backing another sector of potential losses. From the Algarve Daily News.

In a statement issued today, PS party leader Carlos César says MPs “should know in detail all the preparatory and contractual aspects of the sale operation” – bearing in mind the State has no say in the bank’s management, but is guaranteeing to underwrite extraordinary losses of up to €4 billion.

In a happy scenario the other Portuguese banks will be likely to be able to put some extra money into the Resolution Fund but of course many of them have their own problems and the Portuguese economy could do with them backing it.

And a bad scenario? Well look at the sums above……..




The Portuguese banking crisis of 2016 is ongoing

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.

Novo Banco

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.

Oh really?

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.

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?




The Portuguese banking crisis of 2016 is continuing

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.

Portugal’s banks

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