The country’s 10-year bond yield rose to the highest (3.330%) in more than two months in September. DBRS’s rating of BBB (low) leaves it the only major company to rank Portugal’s debt as investment grade. That’s essential for the Portuguese banks to remain eligible for the European Central Bank’s asset-purchase program.
If the nays carry the day, then all bets are off and Portuguese banks will have to offer an untenable yield for their bonds! In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of Portugal thus having a big impact on the country’s borrowing costs (the big three, Fitch, Moodys and S&P maintain Portugal rating below investment grade, known as Junk Bond Level).
Déjà Vu – No Money No Honey
The last time we lost the support of the money markets the apex of the Portuguese 10-year touched 7%, thus triggering the first bail out. The simply veritas fact is that if we lose DBRS, ‘good tidings’ Portugal will face the unenviable task of requesting a second bail out from our triparty friends, the Troika, our pay masters!
So who takes the fall?
Birds of a feather flock together; political corruption and big business. When a country jails its Ex-Prime Minister for alleged collusion with the one of the country’s largest retail bank (Banco Espirito Santo/BES), amongst other accusations, and subsequently the bank is faced with nationalisation or insolvency (the jury is still out and “Novo Banco’s” destiny is still in the balance), then the gloves are off and the blame game begins.
The first casualty on the canvas floor was Portugal Telecom (PT, the jewel in the crown of the Portuguese stock market) share price, which sky dived from its high of €13.31 to its lowest pitiful price on 30th of September at 0.24Cents; a loss of around 99% – why? Well, when PT bought nearly a billion euros of commercial paper (unsecured, short-term debt instrument) from its friendly trusty bank, “BES”, the Bank of Portugal rescinded BES bank licence wiping out PT´s investment, the stock market was not amused and the rest is self-explanatory!
Back to the banking industry in Portugal, or what’s left of it. Currently, it is in free fall and most of the banks are owned by external interests (Africa and Spain). The only state controlled bank, CGD (Caixa Geral de Depositos, the largest retail banking outlet), is in the process of securing a five billion euro loan from the ECB to face of closure or, alternatively, sold off. Not looking too good!
The largest private bank (BCP Millennium) has seen better days, such as on the 29th of June 2007 when the share price touched €4.14 and on the 30th of September 2016 they traded at €0.015Cents (50 BCP shares will buy you a coffee!).
The rest of the banks are none the better, BPN, not so long ago, cost the tax payer circa five billion (the president of the Bank was sentenced for corruption and served time in prison) forcing BPN to be sold at a notional value. Moving swiftly along to present day; on the 21st of December 2015 Portugal secured a €2.2BN loan from the ECB to inject new capital into another retail bank, Banif. This was to sweeten the pill for Santander to acquire the bank, virtually ex gratia.
To conclude; are Portuguese banks safe?
Whilst the Portuguese commercial banks are covered by the European deposit insurance scheme (guaranteeing €100,000 per depositor), what if Portugal fails to secure a second bail out and is jettisoned out of the EU, what happens to our cash deposits? My Portuguese Grandfather reminded me of another Dé jà Vu credit crunch many moons ago; the Portuguese Government of the day offered in exchange for cash deposits a guaranteed bond yielding 3% (Certificado de Aforro) not bad when in the early 80’s the inflation was at 33%.
The banking future is unclear but what is clear is the ever increasing sound of the motley crowd’s pied pipers “leave the EU campaign” in Portugal.
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This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
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