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Portugal goes public on banking woes

Tuesday 30 November 2010 - by Will Henley

The Portuguese financial system is facing "serious challenges" owing to a marked decline in access to international financing, the country's central bank has admitted.

In a highly pessimistic statement issued on Tuesday, the Banco de Portugal predicted a "significant deleverage" in the banking sector as the European Central Bank would no longer be able to prop up its finances.

An intensification of credit and market risk across the financial sector will lead to "inevitable negative effects," it warned.

"The difficulties being faced by Portuguese banks in accessing the international wholesale debt markets essentially reflect the increase in the sovereign risk premium, in a context of greater risk differentiation in the euro area, as well as the Portuguese economy's structural imbalances," the bank said.

Officials insisted that the looming crisis affecting the country's banks did not reflect any "intrinsic" insolvency or lack of profitability in the Portuguese financial system.


However they conceded that ongoing monetary policy support from the ECB, which had aided banks in the early part of 2010, would be "unsustainable" going forward.

The bank said it has been encouraging banks to look for "alternative financing sources".

"The unsustainability of the permanent large scale use of Eurosystem financing will require a redefinition of Portuguese banks' financing strategy, particularly in a framework of persisting major restrictions on access to financing in the wholesale debt markets," it said.

"The adoption of strategies for taking resources from customers is essential in order to mitigate the liquidity risk of the Portuguese banking system."


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