By CHRIS GRAEME
The IMF-EU-ECB Troika will examine Portugal’s banking system situation over the coming weeks.
Issues such as bank capitalisation and deleveraging, public sector debts, and local authorities are likely to top its agenda.
The banks are fearful that if they accept an agreed recapitalisation loan via the Government from Troika funds to pay off public company and institution bad debts, as an incentive to loan cash to struggling companies, their hands will be tied by too much Portuguese State interference.
The banks claim that they never acted irresponsibly over lending or with risky investments in Portugal unlike banks in other countries, and shouldn’t be held to ransom by the State in return for capital injections.
The Troika will examine questions related to the financing of the economy and the banking system as a whole while in Lisbon.
Like previous visits, including the one on Wednesday, the representatives will be Poul Thomsen (International Monetary Fund), Jurgen Kroger (European Commission), and Rasmus Ruffer (European Central Bank).
The visit coincides with a debate around bank recapitalisation being discussed in the public arena with heated exchanges and threats from various sides.
On the table is a possible plan to alter the speed at which the financial system has to deleverage its lending responsibilities and recapitalise its capital ratios.
Critics claim that the banking system is so concerned at beefing up its capital ratios and reducing its borrowing exposure that it is using ECB credits to shore up its balance sheets rather than lend to struggling Small and Medium Enterprises.
The banks state that they still don’t know some information which could affect their capital levels, such as pension fund values or the possible impact of sovereign debt which the banks have on their books for which they have yet to define accounting and loss criteria.
These dossiers are still being studied and the results will not be released until the end of the year, which will have obvious implications on calculating the recapitalisation needs of the nation’s banks.
At the present time Portuguese banks have to achieve capital ratios of around nine per cent by December, while public debt has to be put down at zero cost (without risk); a level at which the four main banks, CGD, BCP, BES, and BPI have announced they have already reached.
An EU summit scheduled for June 2012 is the date limit by which the European financial system must present ratios of nine per cent, taking into consideration sovereign bond prices at the current asking price by that date.
The Portuguese banking system says that it needs more flexibility and time, while the Bank of Portugal says that the banking system will have until 2014 to place the ratio for conversion of credits into deposits to 120%.
BPI and CGD say they are below the level required while BCP and BES are still hovering at around 140%.
But the conversions that will take place in the near future will have to take into account the bad public company and local authority debts in the banking system which totals €40 billion.
The Portuguese Banking Association has suggested to the Government that a slice of the Troika bailout be used to pay off the debts owed to banks from public companies and local authorities.
It argues that this would help the banking system begin lending again to struggling Portuguese companies.
The banks say they are in theory open to the idea, but want a commitment that there will be no undue strings attached from the Government’s side in return for the loans.
The EU’s bank recapitalisation mechanism has been severely criticised by the banks for having rules which make it difficult to avoid the hand of the State, for a long period, in those banking institutions being helped by any future recapitalisation fund.
The Bank of Portugal is now in negotiations with the Ministry of Finances to smooth off the rough edges of the proposed bank recapitalisation law and tone down the Government’s terms, namely proposing that the timeframe for repayment of any handout to banks should be five years with guarantees that the State will not unduly interfere in the way they are run.
