Bank of Portugal governor wants sector's bad debt shifted onto taxpayers

The governor of the Bank of Portugal, Carlos Costa, opened a conference sponsored by Jornal Econômico and PwC by giving a run-down of past mistakes “that cannot be repeated.”

The governor continued in his quest of setting up a ‘bad bank’ to take over the banking sector’s bad debts, by saying that the current situation paralyses banks and the credit supply to the economy, even though banks, in their day-to-day activity, are in a much better situation than they have been.

But Carlos Costa, who criticised those who dare accuse the Bank of Portugal of having been distracted, pointed out some mistakes that cannot be committed again. Errors which, he points out, of course were the responsibility of "past administrations."

The country’s banks need a clean sheet and Costa condemns those who "say that the adjustment programme has failed, as far as banking is concerned. This is showing ignorance, if not illiteracy. It is offensive to the banks and to the Bank of Portugal," referring to the increase in the capital ratios of banks in recent years, as a positive indicator.

“Banks have absorbed the impairments, with implications for their income and capital accounts, an effort that has not been duly stressed: but when banks absorb losses, the annual statement suffers - the results of a bank today are made up of their day-to-day trading results plus bad debt provisions. This comes from a legacy of past decisions for which the current administration is not responsible but still has to manage "

According to data from the Bank of Portugal, banks have impairments of €21 billion, which include €53 billion in bad debt. "Banks can only digest this burden slowly, impairing their ability to grant credit," says the governor. But "the result is a partially anesthetised bank. Alternatively, one can proactively take on and sell these assets at the market price," said Carlos Costa, referring again to his ‘bad bank’ plan.

Asked for a solution to this long-running bad debt problem, Carlos Costa listed the key problems and errors that cannot be repeated - errors that were committed between 2000 and 2010.

The shareholder structure of the banks fostered excess credit risk.

The granting of credit by banks for the purchase of shares in the issuing bank.

Credit risk was underestimated and lending maximised to obtain quarterly results.

The financing of sectors that were dependent on customers' borrowing capacity - the day that families reached their borrowing limit, it was obvious that demand was going to fall.

Too much funding for low-capital companies, assisted by a fiscal policy which continues to focus on debt rather than equity.

Too much credit to individuals with ‘high exposure to the business cycle’ (i.e ‘friends and family’ lending).

Many of these issues were not peculiar to Portugal, added Carlos Costa, recalling that there was a "euphoria in the 2000s, and a now we have to sort out the problems of the past.”

“We can all see from cases like Northern Rock and Lehman Brothers that a bankruptcy does not liberate the market, it creates a general infection," concluded Costa.

We cannot, given these past mistakes, leave the system to itself," warned Costa whose sub-text is his enthusiasm to see Portugal’s banks offloading their bad debt into a newly created ‘bad bank,’ thus shifting the results of bankers’ errors and greed, onto the public.

Costa did not mention his bad judgment in the rushed, ineffective and ruinously expensive bailout of Banco Espírito Santo and Banif nor his lack of rigour in his dual role as governor of the Bank of Portugal and regulator of Portugal’s banking sector.

The lack of speed and effort in sorting out ripped-off BES customers, many of whom have yet to receive a cent, and the lies told to Goldman Sachs concerning its loan of over €800 million, which Costa wiped out overnight by transferring the account from Novo Banco to the old ‘bad bank’ BES, may yet come to haunt him.

In early 2016, Prime Minister António Costa caused controversy by attacking Carlos Costa and the Bank of Portugal for being “irresponsible” by “dragging out” a decision over compensation claimed by BES investors hit by 2014 collapse of Banco Espírito Santo. The Left Bloc and the Portuguese Communist Party openly called for Costa to resign.

The attacks triggered a political storm over what the centre-right opposition described as a “shameful” attempt to interfere in the regulator’s independence.

Despite this and other disagreements with the Prime Minister, Costa has managed to keep his job despite a lackluster performance and a nasty habit of shifting blame onto others.

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