By BILL BLEVINS [email protected]
Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
The Portuguese economy has taken another knock after ratings agency Fitch downgraded four of its leading banks.
It is possible that the country will face further fiscal challenges and have to take harsher action to bring the economy up to a healthier and acceptable standard.
The four banks are Millennium BCP, Banco Espírito Santo (BES), BPI and Banif. Fitch stated that the reasons for cutting their credit rating was increased funding and liquidity risks, as well as deterioration in domestic performance and asset quality.
There was also concern about the banks’ heavy reliance on short- and medium-term wholesale funding sources, increased recourse to the European Central Bank (ECB) as well as their continued difficulties to access the capital markets.
BPI’s ratings were downgraded one notch from A to A-minus while the ratings for Portugal’s largest listed bank, Millennium BCP, and BES were cut two notches from A to BBB-plus.
Banif was knocked down by one level to BBB-minus from BBB, close to junk status. As all the new ratings have a negative outlook, they may be downgraded again by Fitch over the next 12 to 18 months.
In response, the banks retaliated with BES cancelling its contract with Fitch saying that there was “no valid justification” for the rating to be downgraded by three notches in under four months – Fitch downgraded the same four banks in July.
BES told the stock market authority that the rating cut did not reflect the “financial soundness of the bank”, which was in a “strong position… to face current challenges”.
Another large listed lender, Millennium BCP, commented that there had been “no new fact that reflects or implies a significant change in the financing conditions, liquidity, solvency or profitability of Portuguese banks”.
The banks had been able to reduce their reliance on ECB funding since August but Fitch said that “levels remain well above pre-financial crisis levels, highlighting continued funding and liquidity constraints.” It added that “this, together with considerable refinancing needs from debt maturities in 2011 and 2012, have added pressure to the banks’ liquidity and funding position”.
BES said that it had a very strong capital position and had reduced its use of ECB facilities from €6 billion in June to €4.3 billion in September.
The dire state of the Greek and Irish economies are putting pressure on Portugal’s debt markets and borrowing costs – Fitch took action as yields on Portugal’s benchmark 10-year government bonds hit highs of around 6.7 per cent.
Interbank funding has been almost non-existent since Portugal’s sovereign debt was downgraded in April which made the banks reliant on ECB funding.
In October, the ECB lent just over €40 billion to Portuguese banks. Before the Greek debt crisis in May, ECB monthly borrowing rates were between €10 billion and €15 billion.
There has been some criticism of the ratings agencies since the economic crisis began, especially as a downgrading pushes up borrowing costs.
In August, ratings agency Standard and Poor’s downgraded Ireland one notch to AA- status. The move was described as “flawed” by the National Treasury Management Agency which is responsible for raising cash for the country.
Portugal’s parliament had approved an outline austerity budget aimed at bringing down its deficit from 7.3 per cent in 2010 to 4.6 per cent of gross domestic product in 2011.
In 2009 it was 9.3 per cent. The budget includes a 5 per cent cut in public sector wages, a freeze on state pensions and a 2 per cent VAT rise to 23 per cent.
There was a last minute deal between the minority Socialist government and the opposition Social Democrats to approve the austerity budget.
The deal involved a drop of €500 million in projected tax revenue for the government but averted Prime Minister José Sócrates’ resignation.
Further austerity measures may be required to make up for the shortfall, which according to Sócrates would include additional cuts in ministerial budgets and the revenue from concessions to build hydro power plants.
Sócrates said: “It’s very important that we are successful…The central goal is to shield the country from the international financial crisis. The goal is to reach the end of next year with this budget executed and to have one of the smallest deficits in Europe.”
On November 26, Portugal then definitively adopted its 2011 austerity package. Commenting on the final approval, Sócrates announced that the government is now able to focus on its priority of meeting the budget goals and boosting growth.
Generally, when choosing your investments, the higher the investment risk is, the higher the potential return is. But this is one example where this is not the case. Those who invest with Portugal banks are taking a higher risk – that is, that the banks may default – but the interest rate they are getting from the banks is far from commensurate with the level of risk they are taking.
If you want peace of mind about the security of your capital then this would be the time to review your savings and investment structures to see how you can improve them.
For example an EU jurisdiction offers investors a protection regime against institutional failure – investments held in a specialised and tax efficient life assurance bond in Luxembourg are ring-fenced in separate custodian accounts held by third party custodian banks and controlled by Luxembourg’s state regulator.
They can also help with tax planning, which would be an added bonus if Portugal has to raise its tax rates. For advice on asset protection and tax planning, contact an established wealth management firm like Blevins Franks.
To keep in touch with the latest developments in the offshore world, check out the latest news on the Blevins Franks website by clicking the link on the right of this page.