Portuguese banks seek injection, EU-IMF to approve aid

Three top Portuguese banks will receive a huge injection of public cash, the finance ministry said Monday, as Portugal passed its fourth bailout review to open the way for more EU-IMF rescue loans.

In agreeing to inject more than 6.65 billion euros ($8.25 billion) into the private banks BCP and BPI and state-owned Caixa Geral de Depositos (CGD), Portugal will help them meet tough rules drafted by the European Banking Authority to avert another crisis.

The critical need for funds comes as struggling Portugal won approval for another installment from the 78-billion-euro bailout package agreed last year in return for austerity and reforms to the Portuguese economy.

The injection will use funds provided by the international rescue, except for one billion euros to CGD, which as a state-owned institution cannot benefit directly from European Union and International Monetary Fund money.

In announcing the approval, Finance Minister Vitor Gaspar said that EU and IMF auditors would now recommend the release of a 4.1-billion-tranche of rescue loans.

“According to the evaluation made by international institutions, we are respecting our recovery programme,” Gaspar said.

“We met our quantitative objectives,” the minister added, noting a rapid reduction in its external imbalances despite a global economy showing clear signs of slowing down.

“Our budget roll-out remains in line with our 2012 targets and the government should be able to bring the deficit down to 4.5 percent of GDP (gross domestic product) as planned,” he said.

Last year, Portugal became the third eurozone country after Greece and Ireland to be bailed out by the EU, IMF and European Central Bank.

Auditors from the so-called troika had said in April that Portugal was meeting targets and could be strong enough to borrow on financial markets next year though the country was in a deeper recession than thought.

The latest EU-IMF audit of Portugal took place as darker clouds circled around the Portuguese economy.

In a stark warning last week, Portugal’s central bank said the country’s banking sector was vulnerable to a “very major risk of contagion of adverse developments on an international level”.

“These risks are still at very high levels and were exacerbated … by the reinforcement of the connections between the banking system and sovereign risk in a growing number of countries in the euro area,” the central bank said.

The central bank also warned that three of Portugal’s four biggest banks would require state intervention in order to meet the EBA targets, preparing the ground fro Monday’s announcement.

Pushed deeper into recession by austerity measures, Portugal is forecast to contract by more than 3.0 percent in 2012, and the government has issued a new outlook for unemployment for the year of 15.5 percent.

That is expected to rise to 16 percent in 2013.

Gaspar said the deterioration in the jobless numbers required a response that facilitated work.

Reforms launched to make work more flexible must be pursued, the minister said adding that results would be seen in the “medium term”.