PORTUGAL:PORTUGAL HAS denied it is under pressure to get help now from its euro zone brethren but its banks could sooner or later become a trigger for a mayday call if national austerity measures continue to drain liquidity.
Although its banks are not at the heart of Portugal’s woes as Ireland’s are, they are already dependent on a lifeline from abroad, namely European Central Bank (ECB) funding, analysts said.
Now a worsening economic situation is starting to gnaw into deposits by households and the volume of bad loans is on the rise at a time when bank funding remains tight.
“Banks do not represent a fundamental problem in Portugal, but if you look at what could be a trigger for Portugal to seek aid, the banking sector’s liquidity is definitely there,” said London-based Citi economist Giada Giani.
Analysts say Portugal has a few months until a major bond repayment comes due in April to persuade markets it can avoid becoming the next euro zone member to seek a bailout, but its growth and fiscal outlook make it a daunting task.
Portuguese banks have not been exposed to toxic assets in the global financial crisis and there has been no property bubble in Portugal, unlike in Ireland or Spain. But investor concerns about Portugal’s creditworthiness have squeezed the banks out of the interbank market for loans. Analysts say the ECB cannot be there forever for Portuguese banks. The ECB has warned about the risk of creating a long-term dependency on its non-standard liquidity measures and said it will continue to scale down its support next year.
“This oxygen tank will end one day. Banks are seeking liquidity at 1 per cent with the ECB, but in the market they’d have to pay 6, 7 or 8 per cent to be able to borrow, which would put an end to profitability,” Joao Pereira Leite, head of investment at Banco Carregosa, said.
Fitch Ratings this month cut the credit rating of four leading Portuguese banks – Millennium bcp, Banco Espirito Santo, BPI and Banif – citing their reliance on ECB loans, debt coming due in 2011 and 2012 and deteriorating domestic performance and asset quality.
Borrowing by Portuguese banks from the ECB, which hit a record of over €49.1 billion in August, dropped 20 per cent the following month. But last month it was practically unchanged at just over €40 billion, disappointing analysts.
Fernando Ulrich, head of BPI, said this week that he expected his and other Portuguese banks’ dependence on ECB loans to diminish towards the end of the year but next year they will have to pay more for these financing lines than the current 1 per cent.