Stakes increase for new banking crisis

A severe economic crisis following the Covid-19 pandemic and a slow recovery could mean Portugal’s banks will need a bailout to stay afloat.

Hardly yet recovered after the previous financial crisis and Grand Recession of 2011-2014, the warning was sounded by Portugal’s financial supervisor: “if the credit moratoriums and support to companies and families are withdrawn by the Government before the economy starts to recover, this increases the risk that the banks will have to be bailed out”.
The warning was issued in a report ‘A Note on the main measures adopted to mitigate the impacts of the Covid-19: a comparative analysis’ which was approved at the last meeting of the National Council of Financial Supervisors (CNSF) — which includes the Bank of Portugal, the Portuguese Stock Market Securities Commission (CMVM) and the Insurance and Pension Funds Supervisory Authority.
CNSF concerns reflect sector and analyst worries as to the depth and scale of the recession in Portugal this year and when eventual recovery will take place and how long it will take.
What is known is that the eight main banks operating in Portugal are exposed to credit moratoriums of nearly €40Bn.
The moratoriums end at the end of March 2021. The initial end had been scheduled for September 2020.
It means that borrowing costs on loans — and capital instalment repayment freezes in some cases — have been stopped since March for thousands of Portuguese companies in order to save them from going under, but at a huge cost to the nation’s already vulnerable banking sector, and if desperately needed EU funds are not agreed in Brussels this weekend, bank funds could simply dry up.
And Portugal’s public deficit is already calculated to be well over 7% this year according to forecasts for the Supplementary Budget approved earlier this month.
According to new calculations from the Council of Public Finances, the deficit could reach anywhere between 7.6% to 10.5% of GDP.
Carlos Costa, who is leaving his post as Governor of the Bank of Portugal, has also showed concern.
In an interview with the Forum of Official Monetary and Financial Institutions, Costa called for the implementation of prudent rules that would give the banks greater flexibility concerning the reclassification of loans currently within the moratoriums.
The aim is to “avoid that this debt reclassification turns into a bottomless well of losses, affecting bank capital ratios and the capacity of the banks to lend and, in the worst case scenario, avoid running the risk of collapsing and needing recapitalisation” bailouts said Costa.
“We need a budgetary policy that takes into account the health of the companies sector that will also safeguard the health of the financial sector,” he warned.
Portugal’s bankers are said to be running scared after seeing profits plummet in the first quarter of 2020 because of the impact of the Government’s measures adopted to provide liquidity to families and companies.
Market analysts expect difficult days ahead for the banking sector and do not rule out nationalisations and other state support as well as capital calls from shareholders at even the most robust banks.
According to IMF economist Filipe Garcia, quoted by online business news source Dinheiro Vivo, “Investors are aware of the problem. The difference between this crisis and the ones that came before is that this one will not come as a surprise. The authorities and Government will have to be available to prevent a financial crisis,” he says.