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Portugal banks shun rescue loans despite credit crunch

Published on 04/10/2011

Portuguese banks are refusing funds made available under an EU-IMF debt bailout despite widespread fears that a credit crunch is undercutting chances for economic recovery, analysts said.

In the 78-billion-euro debt rescue plan agreed in May, the European Union and International Monetary Fund set aside 12 billion euros to recapitalise Portugal’s troubled banks and boosted government lending guarantees to 35 billion euros ($47 billion).

“For the time being, these 12 billion euros are not attractive for the banking sector,” head of the Portuguese banking association Antonio de Sousa said last week, while noting the country faces a credit crunch.

To Sousa, the financial sector faces a “liquidity problem” not a lack of capital and the aid would be better spent on reducing the 40 billion euros in debt held by Portugal’s state-owned companies.

But according to analysts, banks do not want to use these funds from the EU and IMF for feat that would open the door to the Portuguese state taking a share in their companies.

“They (the banks) do not want the state intervening in management or their credit policies and fear public capital could disturb a delicate shareholder balance,” said economist Paulo Pinho from Nova University in Lisbon.

But Pinho said this reluctance by the banks to accept EU-IMF help was a risk to the Portuguese economy which is set to shrink 1.8 percent in 2011 and 2.3 percent in 2012.

“From a growth perspective, the lack of credit is a threat as serious as the negative effects of budget austerity,” the economist warned.

In exchange for the EU-IMF debt rescue, the government has begun to implement strict austerity measures to reduce public debt as fast as possible and stabilise the public finances.

As one of the victims of the eurozone debt crisis, Portuguese banks no longer have access to interbank lending and must rely on the European Central Bank for short-term credit.

By late August, the banks had received more than 46 billion euros from the ECB, according to Portuguese central bank data.

In hopes of accelerating Portugal’s return to the lending markets, Portuguese authorities and its creditors have forced banks to reinforce their financial position.

By the end of the year, Portuguese lenders must increase their top rated tier-one capital ratio to nine percent, and to 10 percent by the end of 2012. Banks must also reduce their loan to deposit ratio to 120 percent by 2014, down from about 150 percent in 2010.

This deleveraging push contributed to a 62 percent fall in household loans in July compared to a year earlier and an 18.5 percent drop in loans to businesses.

“Deleveraging cannot be carried out at the expense of financing the economy,” warned Portugal’s central bank chief Carlos Costa.

Portugal’s president last week said banks were perhaps overly cutting back on credit and that “demands by the troika (the EU, IMF and European Central Bank) perhaps go too far.”