Senior Portuguese bankers have dismissed suggestions that the country is set for a Greek-style default on its loans, after yields on long-term Portuguese bonds rose above 17% this week, amid claims that Portugal might need a second bailout.
However, the country’s banks insist that both fiscal and financial sector reform is on track.
With Portugal having agreed to a package of measures in return for a €78 billion bailout last year from the troika – the International Monetary Fund, European Central Bank (ECB) and the European Commission – the negotiations over Greece’s default in Brussels this week have brought the country back into focus.
However, Francisco Cary, deputy chief executive officer of Banco Espírito Santo Investimento, says the market’s nervousness is misguided.
“The Portuguese government has been implementing the reforms at a faster pace than was part of the agreement last June,” says Cary. “We have, as a country, been very compliant.”
Gonçalo Pascoal, chief economist at Millennium BCP, says part of the explanation for the sudden spike in sovereign yields was technical.
Earlier this month, credit rating agency Standard & Poor’s downgraded Portuguese debt to junk status, which, in turn, triggered an automatic sell-off by index-tracking funds with no mandate to hold such low-grade bonds.
Those sales have gathered pace as funds adjust their month-end portfolios.
Pascoal says Portugal’s banks had played their part in seeking to reassure the markets, raising capital ratios and deleveraging.
“It would be foolish not to think that Portuguese banks would hold their share of public debt but the whole banking sector has already put in place conclusive plans,” says Pascoal.
The loans-to-deposit ratio in Portugal’s banking sector has been reduced from 148% to 139% during the past year, heading towards the 120% target agreed with the troika.
Nevertheless, bankers concede there is little immediate prospect of wholesale funding markets reopening to them this year, or even in the first half of 2013, leaving them dependent on the ECB’s generous funding programmes.
In December, the ECB released €489 billion of funding in its long-term refinancing operations, and a second round of the programme is due next month. There is now speculation that the ECB might offer as much as €1 trillion this time around.
“One major difference in Portugal is that the population is still confident in the banking system, so the deposit rate is going up, mitigating the need to go to the ECB for the funding balance,” says Cary. “Nevertheless, the banks are essentially relying on the ECB to refinance the debt that has been maturing.”
Portugal’s leading banks are also due to report full-year results in the next 10 days, in an exercise being coordinated by the Bank of Portugal. With several institutions set to reveal losses as loan defaults mount, the central bank is anxious to avoid a further loss of confidence in the country’s financial sector.
Alongside earnings figures, each bank is due to set out further plans for recapitalization this year, in line with new requirements from the European Banking Authority.
It has set the banks a new minimum core tier 1 ratio of 10%, to be achieved by the end of the year, reflecting concern about their exposure to Portuguese sovereign debt.
Insiders at the biggest banks say that while they expect to raise some additional capital in the markets, several will be forced to tap a state-backed capitalization fund that has €12 billion at its disposal.
Our in-depth report on the state of the Portuguese banking system will be published in the March issue of Euromoney