Thursday, 13 October 2016

Portugal responds to Oettinger’s second bailout warning with plummeting bond yields

Portugal exited the first bailout in May 2014. © Flickr

EU Commissioner Günther Oettinger, in charge of the Digital Economy and Society, dropped a bombshell on the Portugal political scene, when he announced the possibility of a second bailout for the recovering country. “The worry is that Portugal will need a second bailout to finance its budget. I can’t tell you what the probability is, but it is higher than zero,” said the German Mr. Oettinger during a visit to Lisbon to discuss Portugal’s performance in digital areas.

The Portuguese government found the Commissioner’s declarations inflammatory and promptly reproached his behaviour. Foreign Affairs Minister Augusto Santos Silva dismissed the prospect of a second bailout and recommended “common sense and responsibility when they [politicians – including members of the European Commission] speak”, wrote the daily newspaper Público. “And if we do not know well the reality that we comment, we should not comment on it," Santos Silva added, accusing Oettinger of designing a gimmick to get media attention and startle the markets.

Budget (non)troubles

The Portuguese government is currently preparing the draft budget for the coming year and they are confident that the country will comply with the expected targets, despite a sluggish economy affected by slowdowns in exports to major markets such as Angola, Brazil and China. As a matter of fact, during the summer Portugal struggled – and succeeded – to avoid sanctions from the Commission for its failure to cut excessive deficits. The government’s battle with Brussels is now over the EU structural funds, an amount of €3.5 billion of which is in danger of suspension.

Nevertheless, Prime Minister António Costa reaffirmed that the idea of a second bailout ”is completely nonsensical” and insisted that “Even with the current level of growth, this year we will meet the deficit reduction objective for the first time and have a deficit comfortably below the 2.5 percent [of GDP] fixed by the Commission”.

Portuguese city Oporto. Flickr © Paola Spartà

Systemic banking crisis

However, the banking woes continue and are undermining the whole stability of the country. Since the onset of the financial crisis in 2008, Portugal witnesses its banking system slowly falling apart. Banco Privado Português (BPP) went bust and Banco Português de Negócios (BPN) was nationalised only to be sold in 2011 to the Angolan BIC bank. Bad investments, embezzlements and fraud were at the root of the banks’ failure.

Then Banco Espírito Santo (BES) came along. Once the second biggest bank in Portugal, BES was nationalised in 2014 when the State intervened to rescue it with €4.9 billion. This action split the bank in two – the “good” bank called Novo Banco and the “bad” bank where toxic assets were accumulated.  The government is still struggling to find a buyer.

In late 2015 was Banif’s turn. The government paid €2.2 billion to rescue Banco Internacional do Funchal (Banif) in a deal involving the bank’s sale to Spanish Santander for €150 million, following the same splitting scheme of “good” and “bad” bank. Finally, the state-owned bank Caixa Geral de Depósitos (CGD) is currently under restructuring plans including an injection of capital.

The government has spent around €14 billion of public money on safeguarding the “soundness” of the banking sector. However, it is doubtful that this money was put to good use and certainly much of it will never be seen again.

Throughout the crisis, Portugal was seen as the “good student”, religiously following the German medicine. Praises were even heard from the finance minister Schauble who applauded the Portuguese pragmatism in implementing the adjustment programme. However, these remarks were all but a strategy to continue implementing austerity policies – especially in Greece - making the public believe that they were indeed a great success and the path to prosperity.

Rating Agencies

The role of the rating agencies – mainly the “Big Three” – has been subject to condemnation during the financial crisis. Their favourable pre-crisis ratings of insolvent financial institutions like Lehman Brothers gave rise to better scrutiny and surveillance of the agencies’ work. Last year, Standard & Poor’s rating agency reached a €1.5 billion deal with the US over a lawsuit related to misconduct.

The single rating agency still holding a tough line on Portugal’s investment grade is the Canadian DBRS. On October 21, the agency is due to revise Portugal’s BBB (low) rating to a stable outlook. Confidence seems building up, as Portugal saw its ten-year bond yield drop since last June after Finance Minister Mário Centeno’s interview to Bloomberg.

“I heard very positive comments” said Centeno after a lunch meeting with DBRS last Friday October 14 in Washington. “Basically the position they have is that they feel very comfortable about our fiscal position, which they labeled ‘very strong.’ Of course, our expectation is that they will not change the outlook or the grading that we have.”

Moreover, PM António Costa’s official visit to China has also positively boosted the increase of confidence in the markets. In Beijing, Costa and Chinese Premier Li Keqiang signed eight agreements covering areas such as energy, healthcare, infrastructure and culture. Portugal is currently China’s fourth largest investment destination in Europe after the UK, Germany, and France.

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