The Prime Minister and the Governor of the Bank of Portugal at last have agreed on something, albeit a dangerous proposal to lump all of the bad debt in Portugal’s banks into one glorious toxic deposit in a new mega-bank.
The ‘bad bank’ proposal could purge the banking system of toxic assets, an idea floated by the prime minister and enthusiastically approved of by Carlos Costa whose economic grasp is as suspect as ever.
The Bank of Portugal’s governor spoke openly of this possibility back in February, saying it was "desirable" that there were "solutions to remove punitive assets on bank balance sheets by placing them in vehicles that allow their sale to investors."
"There’s no need to call it a ‘bad bank.’ You can create a vehicle, as was done in Spain, into to which non-performing assets are placed," said the Governor, revealing that he had already talked about it with the government and that if this mechanism is created, it should be a "European solution or with European support."
The Prime Minister now has endorsed the idea and wants a "vehicle for resolving the bad debts" of Portugal's major banks.
"We have to work with the regulatory institutions and with financial institutions to resolve the so-called ‘non Performing Loans’ and I think it would be useful for the country to find a vehicle for resolving bad debts, to release the financial system from a burden that hinders the banks taking a more active role in the financing needs of Portuguese companies," said the PM, seemingly oblivious to the disruption in Spain when the government tried the same ruse.
Carlos Costa again defended the creation of a ‘bad bank’ at the Banif inquiry, recalling the examples of Ireland and Spain, but acknowledged that it was not straightforward because it would "create a additional restrictions on the funding available to the economy."
The prospect of Carlos Costa being charged with setting up a ‘bad bank’ which parcels up investments for sale fills much of the financial community with horror, reminiscent as this is of the US experience that led to the sub-prime mortgage fiasco which in turn led the world off the financial cliff into years of austerity.
Comments
All those billions worth of loans made to important friends and family that were entirely unsecured. So unclaimable - yet obviously in the category of "bad". Even if the Panama Paper leak shows these unsecured loans exist, how does that get explained in the accounts of the bad bank ? If not mentioned at all then leaving Portuguese Banks still weak - nursing losses. Over to you Carlos - lets see more of the miracle workings!