As the European Central Bank conducts no-nonsense stress tests designed to flag-up any likelihood of further BES-type horrors in the wings, the big question is: “How many more rotten banks are hidden in plain sight?”
The answer is pivotal. With the world’s economy in slowdown, and problems like Ebola and I.S. dogging the big picture, all eyes are on how the European banking sector can go forward into 2015.
Thus far, it has been a dismal year – particularly for Portugal. Putting government spin on hold for a moment, the BES banking scandal is far from over and the country will be paying for it for years to come.
Only last week, prime minister Passos Coelho finally conceded that the taxpayer may well end up footing the bill for the massive bailout that resulted in the creation of ‘good bank’ Novo Banco – a bank so ‘good’ that experts doubt it could ever be sold on well enough to recoup the expenses of the bailout.
Intriguingly, Novo Banco will not be undergoing a stress test. It simply is not in shape for one. The European Banking Authority announced on Friday that this particular stress test had been postponed.
But as financial pundits await results elsewhere – and “war games” are played out in UK and the US to try and ensure no more Lehman Brothers-type disasters could wrong-foot the global economy – there is another black cloud on the horizon, one that appears to be getting blacker.
Predictions by “experts” from across the Pond all point to an imminent American stock market collapse. An implosion that could wipe as much as 60% off share prices and create devastating aftershocks throughout Europe.
For now, the cloud is simply one of warning. Last week saw Lisbon’s stock market plummet to a new low, but since then things have perked up. In the end, it depends on who you listen to although the writing would seem to be very much on the wall.
According to financial news website Moneynews this week, doom-laden predictions have ratcheted up, with the latest expert, Chris Martenson – described as a scientist whose opinions are “taken seriously by the United Nations, UK Parliament, and Fortune 500 companies” – suggesting a 60% collapse will strike “within the next three months”.
Martenson’s warnings follow those by another guru in the business of predictions, hedge fund manager Mark Spitznagel, who went on record last week saying: ““We have no right to be surprised by a severe and imminent stock market crash. In fact, we must absolutely expect it.”
As these uncertainties play out on the global financial scene, European Central Bank boss Mário Draghi continues to juggle with strategies designed to boost the ailing eurozone economy.
ECB to share partial stress-test results with banks
One of the reasons for the stress-test deadline is that, as of November 4, the ECB will be controlling all eurozone banks. As a financial expert explained, “the aim of the project is to scour the banks’ books for hidden problems, test their ability to stand crises and force the weak ones to raise more capital or close.”
One of Draghi’s strategies is to share partial results so that banks can use the time to “take additional methods” if they are needed.
“Authorities want the test to be tough,” Álvaro Benzo, a partner at PricewaterhouseCoopers told WSJ, “but you don’t want to create panic in the market”.
Indeed, WSJ explains that the ECB actually needs some banks to fail the tests, as this will show testing criteria have finally been made credible.
In the past, tests “were hamstrung by national authorities’ reluctance to expose their banks’ weaknesses”, Reuters reports.
A banking expert told the agency that this time, “we have a completely new pair of eyes, and the ECB has every incentive to be tough because it doesn’t own the present failures, but it will own the future failures”.
Where does this leave Portugal? We will find out all too soon. The stress-test results are due to be published on October 26 and, according to WSJ, “smaller banks are seen as most at risk of flunking”.
The paper adds that “Goldman Sachs analysts surveyed 125 institutional investors, and their consensus is that nine banks will fail”, including Portugal’s Banco Comercial Português S.A.
WSJ claim “Portuguese banks declined to comment” when approached for further commentary.
Cavaco contradicts PM and finance minister over BES ramifications
In a surprise move this week, President of the Republic Cavaco Silva suddenly re-emerged into the financial spotlight, declaring prime minister Pedro Passos Coelho and his finance minister Maria Luís Albuquerque were wrong when they said taxpayers could well end up footing the bill for the €4.9 billion BES bailout.
“It doesn’t make sense,” he told journalists after a day out visiting national businesses. “If it was like this we would have to say that when a family or business doesn’t pay its bills, taxpayers would have to support the costs.”
In this case, at stake is the money ploughed into the Resolution Fund bailout by state-owned bank Caixa Geral de Depósitos – again one of the 128 institutions that will have undergone the stress tests due to report next weekend.
Government seen as “hanging by a thread”
As the government went into an 18-hour huddle to discuss minutiae of next year’s state budget, political commentators likened the spectacle as being reminiscent of “the worst moments” of the catastrophic and short-lived PSD government of Santana Lopes.
Remarking that 18 hours is an extraordinary length of time to have basically emerged with zero news, former Socialist prime minister José Sócrates said during his weekly TV slot that it showed the coalition government is “hanging by a thread”.
The nitty-gritty emerging at three o’clock on Monday morning was bleak, and showed that the tax burden is here to stay, at least until 2016.
Público outlined the “compromise” that concedes the IRS “sobretaxa” (extra tax) should be eased, but makes any relief dependent on the state’s capacity to combat fraud and tax evasion, and any eventual growth in the economy.
“For taxpayers, nothing changes throughout 2015,” wrote the paper. “They will simply be informed every three months how the government’s income from taxes is developing”, and any reduction of the ‘sobretaxa’ will come only at the end of the year “at the moment of agreeing payments with the taxpayer, in the middle of 2016”.
This “contract of trust”, as it is being called, is now to go up for discussion with the Socialist Party, writes Correio da Manhã, and the budget itself was due to be presented in parliament as the Resident went to press on Wednesday.
As Sócrates commented, “the state budget is a law that takes a long time to be constructed and negotiated. It is something that should be done over a period of months, not in one meeting”.
For now, what is clear is that the government plans to reduce IRC for businesses by two percentage points; increase minimal pensions by €2.5 per month; scrap the controversial CES payment on pensions (except to those receiving very high monthly amounts) and return to public sector workers the 20% salary cuts that were deemed unconstitutional.
Other aspects are bound to come to light in the next few days, including the scrapping of IMI property rates for as many as 50,000 financially-strapped families.
There is, for example, the proposal for a new tax on laboratories designed to rake in money on medication sold for distribution by the health service.
By NATASHA DONN [email protected]
Photo: Finance minister Maria Luís Albuquerque