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Portugal needs a strong capital market independent of banks

By CHRIS GRAEME [email protected]

Portugal’s economic recovery is being hampered by its weak financial system and lack of independent capital markets.

Addressing members of the British-Portuguese and South Africa chambers of Commerce, Carlos Tavares, President of the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários – CMVM), said that financial asset companies in Portugal needed to be more independent of the banking system.

The economist and former banker said there was a lack of independent investment entities and banks in Portugal and those offering asset management services were all linked to the commercial banks, creating a “conflict of interest”.

“This explains the fragility of our capital markets and is a major problem for the development of our economy,” he said.

Speaking at the luncheon, following a seminar entitled The Troika Effect in Portugal, organised by the South African-Portugal Chamber of Commerce, Carlos Tavares warned that the entities that formed part of the large Portuguese banking groups were the same ones organising trading operations on the stock market, such as the IPOs (Initial Public Offerings) or floatations, often operating with conflicts of interest.

After presenting the Annual Supervisory Report for Financial Activities and Analysis 2010, which concluded that the majority of research produced by financial analysts did not reflect the true value of shares, Carlos Tavares said he was “worried” about the behaviour of financial analysts and their impartiality.

He accused the analysts working for banks which floated these IPOs of “very often pushing or inflating the value of shares to be sold on the stock market above and beyond their true values” to serve the interests of their clients (the companies dispersing the capital), and then later offering them to investor clients at prices which often did not reflect the actual value of the share asset.

Another issue that worried Carlos Tavares had to do with the fact that many investors were losing money as a result of recommendations from financial analysts and which were being peddled in daily newspapers.

“The opinions of ratings agencies and financial analysts are susceptible to conflicts of interest given that these same financial analysts work for investment companies who hold shares which are issued by their partners.

“Theoretically research should not influence the price of shares which should be evaluated from a broad base of different opinions, but they do influence them, especially if they are being sold,” he said.          

Carlos Tavares, who heads the institution which in April celebrated its 20th anniversary, explained that Portuguese companies suffered from structural imbalances in their finances which had to be corrected.

The debt owned by non-financial sector companies in Portugal represents 150% of the GDP – one of the highest in Europe.

Overall 29 per cent of the investment and credit lending to Portuguese Small and Medium Enterprises (SMEs) came from banks, 59% came from self-financing, 1.9% from the State, 4% from EU funds, 0.8%  from other diverse sources but only 0.3% from capital assets and stocks and shares.

“In other words our capital fund instruments, which should give stability to the markets, practically don’t exist in Portugal and are badly needed by Portuguese companies wanting to expand and grow and need to become competitive in order to do so,” he said.

The result was that 70% of Portuguese external financing for companies without their own capital came from banks.

This lack of capital markets also meant that successful companies had difficulties investing their results in other companies that were more efficient and competitive, which was a source of loss in competitiveness.

“Our weak capital market is a problem that has to be addressed. We have to create the right conditions in our financial sector so that production grows and the economy is more competitive,” said Carlos Tavares.

The consequences of failing to do so would become apparent at the end of the austerity programme when the Portuguese State would be slimmer but weaker rather than fitter and with no capital to gain weight again.

Carlos Tavares said this notion had been “severely underestimated” in the past when the capital markets as they were, were seen as a “type of casino where one played on a daily basis.”

If Portuguese SMEs want to grow and expand they won’t be able to under the current framework and will remain underinvested and undercapitalised in a local market.

“If you don’t have a strong internal market then how can your companies hope to expand and grow outside,” Carlos Tavares said, adding that he had seen many companies which were promising from an economic point of view but often came into irreversible difficulties over cash-flow problems.

“Our companies need these asset companies to grow, they need a non-banking financial sector which is more independent and can have a greater role in capturing savings and applying them to investments,” he said.

This needed measures: fiscal, regulatory, and legislative as well as the incentives at a government level to encourage savings and investment.      

Carlos Tavares also said that he was confident that the new Minister of Finance, Vitor Gaspar, would be a success and was the “right man for the job” given the current difficulties the country was facing.

“I don’t usually make comment about government figures, but today I’ll make an exception about Vitor Gaspar,” he said, adding that he would be a key player in ensuring the programme negotiated by the ‘Troika’ was carried out given his “experience and knowledge.”