New bank collapses ‘could be on the way’, warns central bank

New bank collapses could be on the way, Portugal’s central bank has warned, unless Member States act together to stem the effects of the Covid pandemic on the financial sector.

The Bank of Portugal’s “Report on Financial Stability” published yesterday (Wednesday) doesn’t mince its words.

“If the measures of government support to the non-financial private sector are not of an adequate dimension or sufficient in terms of the length and magnitude of the pandemic crisis, or if they are withdrawn too soon, the risk of ‘non-compliance’ (people and companies being unable to pay their loans) could trigger the need for direct intervention on the financial sector”.

Still headed by Carlos Costa – a governor with enormous experience of banking collapses – the Bank praised measures taken by the government and the European Central Bank already, but says more are needed, within a framework of European coordination, to ensure that weaker countries “are not even further penalised”.

Say reports, the warning boils down to the need for “the adoption of unprecedented budgetary stimulus measures” which will have nonetheless to tread incredibly carefully when it comes to choosing which companies to support and which to let fall.

The BdP report states clearly that finance should be limited to “companies that were viable at the beginning of the pandemic.

“The concession of excessive support to unviable companies could impede the reallocation of resources in the economy and contribute to the growth of zombie companies”.

The warnings come as Portugal is still awaiting decisions from Brussels on the extent of pandemic support to come within the next ‘pluriannual budget’.

natasha.donn@algarveresident.com