By: CHRIS GRAEME
PORTUGAL SHOULD withstand the worst fallout from the economic crisis in Europe and the United States despite suffering some “scratches and bruises.”
Vítor Constâncio, Governor of the Bank of Portugal, said Portugal was not “at the centre of the hurricane.”
The small dimensions of the Portuguese financial and banking sector, far from the principal centres of New York, London, Paris, Frankfurt and Tokyo, coupled with negligible investments in high risk credit and hedge fund vehicles means that the country is unlikely to be severely affected.
However, he warned that when the crisis was touching the very heart of the financial centre “no one was completely immune”.
Following the collapse of investment bank Lehman Brothers, the nationalisation of the United States’ largest insurance entity AIG, the absorption of Merryl Lynch into the Bank of America – all of which caused stock markets around the world to crash to their lowest levels in years – investors were temporarily buoyed up by news last week that the United States’ Federal Reserve would provide a 700 billion bail-out package to buy up bad loans and stabilise the financial system.
Without the power to influence outside events, Portuguese banking leaders have by and large chosen to remain silent given that many of Portugal’s largest companies are multinationals or have significant international participations.
Those financial entities such as Banco Espírito Santo (BES), Banco Português Investimento (BPI) and Banco Comercial Português (BPC) have interests in largely smaller countries developing financial sectors such as Greece, Turkey, Poland, Romania, Angola and Mozambique.
This means that 70 per cent of these Portuguese banks’ available investments, hit hard over the last two years by a series of financial scandals and the economic downturn, have been ploughed into developing the banking entities in these countries leaving little capital profit to invest on the international money markets.
However, there are negative impacts that these Portuguese banks cannot escape from, namely the increasing climate of suspicion and fear among businesses, investors, clients and lenders, in a banking sector already damaged by failed mergers (BPI and BCP) and financial fraud scandals (BPC).
The withdrawal of credit from banks and clients, and the resulting higher inter-banking interest rates, means that Portuguese companies wanting to invest in a project or business cannot get the funds at a reasonable rate. This, in turn, leads to the country’s economic growth reaching a standstill.
Under such circumstances where getting credit on the open markets is too expensive for small Portuguese banks, the only option open to them is raising capital, which Portuguese banks had already done last year and earlier this year.
Banks can also sell their assets, institute more efficient management policies to control costs, close branches and lay off staff, merge with other banks or go with cap in hand to the European Central Bank.
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