The Portuguese credit and lending culture.jpg

The Portuguese credit and lending culture


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In this, the second part of an interview with former banker and current real estate analyst for Aguirre & Newman, Carlos Moedas outlines the reasons why the credit crash fallout from the United States will be limited in Portugal.

THE RECENT problems in the United States and United Kingdom financial markets stem from trading on debt which were not backed by the good name of a company but by risky assets such as moody mortgages, re-mortgages, consolidation and credit card loans.

Mostly held off-balance-sheet by bank-sponsored ‘conduits’, this market has boomed in recent years and roughly makes up half of US$ two trillion worth of commercial paper outstanding.

In other words, there were banks indirectly buying and selling high risk debt, and taking a cut, because the interest rates on the debt was so high and therefore lucrative.

That’s all good and well when the markets are calm, but issuers are vulnerable when investors start to doubt the quality of those assets and want to offload them.

The result is a credit liquidity deficit and a lack of ready cash, as was the case for the British high street building society Northern Rock, which relied on funds from these markets.

That is exactly what happened in August, when money market funds sold risky debt causing interest rates to soar like never before. This kind of bond suffers from two main types of mistrust if things go wrong: First investors get worried that the banks won’t always be able support the conduits.

Secondly, rating agencies that had misjudged default rates in sub-prime mortgages in the US then had to downgrade hundreds of thousands of securities linked to them. The results were all too obvious.

But in Portugal that simply was never the case: “people often forget that bank loans to the general public here were simply unheard of 25 to 30 years ago,” says Carlos Moedas.

“Then, no one could get a loan, there was no market for it, no one would lend you any money unless you had lots of security. The business of home loans as it is today is relatively recent and back in 1980 there were only two banks in Portugal offering  mortgages to run-of-the-mill people: Crédito Predial and Montepio Geral – the other banks were not in the business of mortgage lending,” he says.

The creation of that business, the fact that interest rates back in the mid and late 1980s were running at 20 per cent, created an amazing market for people and property ownership.

Even today in both Spain and Portugal the banks have much stricter norms about lending money to people.

“I personally had the experience of buying a flat in London and in Lisbon and it was far easier to buy in London where they didn’t even want a certificate of earnings or proof that I was working where I told them I was working,” says Carlos Moedas.

Carlos Moedas believes that in the United Kingdom, like in the United States, it’s been very easy to get money, even over the phone. It’s even possible to get interest only loans which are unheard of in Portugal.

More cautious

In Portugal you have to send proof of earnings, IRS returns, papers from work, a signed document from a guarantor whereas the system in Anglo-Saxon countries got to the point where banks took the risk because they knew they had the collateral or home and could sell it.

In Portugal, people know how the justice system works, or rather doesn’t, and it is slow and inefficient, so banks think twice before lending irresponsibly.

“Banks here haven’t got into the sub-prime market; they are more cautious and have to be sure. In terms of procedure I see less danger. I don’t think Portugal needs to panic. That’s not to say that a slowdown in the world economy for whatever reason won’t effect Portugal, but a local lead crisis here in the banking sector from widespread defaults is unlikely,” reasons Carlos Moedas.        

Of course then, as today, some people borrowed too much. There will be people with difficulties in paying their loans simply because in Portugal people were not, and many still aren’t very savvy and up on the economy and financial products.

“There was this boom in the market, yet the Portuguese didn’t have the experience of financial culture like in the United States or the United Kingdom, where people understand financial products better,” he adds.

“I think the problem with indebtedness in Portugal is very different from the USA or the UK. In Portugal the common people don’t always understand what they’re buying and paying for, don’t understand the concept of interest rates, the responsibilities they were getting into,” he stresses.

“It’s not a question of the banks lending silly amounts with no guarantees, but certainly credit will become even harder to come by,” he concludes.

Next week: What lessons the financial sector has learnt from the crisis.

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