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Judgement day on October 21 for banking in Portugal

On October 21, DBRS (Canadian rating agency) publishes its decision on whether it will maintain its BBB rating to Portugal. DBRS is the only rating agency, on a world scale, underpinning Portugal’s credit worthiness.

The country’s 10-year bond yield rose to the highest (3.330%) in more than two months in September. DBRS’s rating of BBB (low) leaves it the only major company to rank Portugal’s debt as investment grade. That’s essential for the Portuguese banks to remain eligible for the European Central Bank’s asset-purchase programme.

If the nays carry the day then all bets are off and Portuguese banks will have to offer an untenable yield for their bonds! In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Portugal, thus having a big impact on the country’s borrowing costs (the Big Three – Fitch, Moodys and S&P – maintain Portugal rating below investment grade, known as Junk Bond Level).

Déjà vu – no money no honey

The last time we lost the support of the money markets, the apex of the Portuguese 10-year touched 7%, thus triggering the first bailout. The fact is, if we lose DBRS’ good tidings, Portugal will face the unenviable task of requesting a second bailout from our triparty friends, the Troika, our pay masters!

So who takes the fall?

Birds of a feather flock together; political corruption and big business. When a country jails its ex-prime minister for alleged collusion with one of the country’s largest retail bank (Banco Espírito Santo/BES), amongst other accusations, and subsequently the bank is faced with nationalisation or insolvency (the jury is still out and Novo Banco’s destiny is still in the balance), then the gloves are off and the blame game begins.

First casualty on the canvas floor was Portugal Telecom’s (PT, the jewel in the crown of the Portuguese stock market) share price, which skydived from its high of €13.31 to its lowest pitiful price on September 30 at €0.24. Loss of circa 99% – why? Well, when PT bought nearly a billion euros of commercial paper (unsecured, short-term debt instrument) from its friendly trusty bank, BES, the Bank of Portugal rescinded BES bank licence wiping out PT’s investment. The stock market was not amused and the rest is self-explanatory!

Back to the banking industry in Portugal, or what’s left of it … the sector is in free fall and most of the banks are owned by external interests (Africa and Spain).

The only state-controlled bank, CGD (Caixa Geral de Depósitos, the largest retail banking outlet), is in the process of securing a €5 billion loan from the ECB to avoid closure or alternatively being sold off. Not looking too good!

The largest private bank (BCP Millennium) has seen better days, such as on June 29, 2007 when the share price touched €4.14 and on September 30, 2016 they traded at €0.015 (50 BCP shares will buy you a coffee!).

The rest of the banks are none-the-better. BPN, not so long ago, cost the taxpayer circa €5 billion (the president of the bank was sentenced for corruption and served time in prison), forcing BPN to be sold at a notional value.

Moving swiftly along to present day, on December 21, 2015 Portugal secured a €2.2 billion loan from the ECB to inject new capital into another retail bank, Banif. This was to sweeten the pill for Santander to acquire the bank, virtually ex gratia.

To conclude – are Portuguese banks safe?

Whilst the Portuguese commercial banks are covered by the European deposit insurance scheme (guaranteeing €100,000 per depositor), what if Portugal fails to secure a second bailout and is jettisoned out of the EU? What happens to our cash deposits?

My Portuguese grandfather reminded me of another déjà vu credit crunch many moons ago; the Portuguese government of the day offered in exchange for cash deposits a guaranteed bond yielding 3% (Certificado de Aforro) – not bad when in the early 80s the inflation was at 33%.

The banking future is unclear, but what is clear is the ever-increasing sound of the pied pipers’ ‘leave the EU campaign’ in Portugal.

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By Antonio Rosa

Antonio Rosa, Regional Manager Lisbon for Blacktower Financial Management (International) Limited. 214 648 220
antonio.rosa@blacktowerfm.com
Quinta do Lago: 289 355 685.
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