Sunday, November 02, 2008

Portugal Follows Suit with Injections and Bank Buy-out

Sources: Financial Times- Portugal to nationalise local bank; Reuters- UPDATE 1-Portugal offers banks 4 bln euros to boost capital

Today, Bank of Portugal Governor Vitor Constancio and the socialist government announced that he will inject up to €4 billion into the country's banks to give capital ratios a boost in the midst of the financial crisis. He hopes to elevate the current ratio of 7 percent to 8 percent. Prior to the announcement, the only assurance the government had offered banks was a €20 billion loan guarantee.

The news followed on the heels of this morning’s announcement that the Portuguese government will intervene to nationalize Banco Portugues de Negocios (BPN), a small, private bank that accumulated losses of €700 million. The Ministry of Finance claims that the plan to take on preferential shares of the bank is a temporary fix to be utilized for a maximum of 5 years. Finance Minister Fernando Teixeira dos Santos choose the plan over a government-backed rescue because of spending concerns from taxpayers. The nationalization of BPN will be the first instance of government intervention in a Portuguese bank since 1974.

Analysts have applauded the socialist Portuguese government for its handling of the crisis and Portuguese banks’ conservative lending practices. Unlike the U.S. and many other European countries, Portugal’s housing market neither bubbled nor burst, positioning it well during the initial stages of the crisis. Officials cited Portugal’s need to not be left behind by Europe rather than an inherent weakness in the overall banking system. Teixeira dos Santos alluded that BPN transactions of “dubious legality” compounded the bank’s problems as last week some BPN officers alerted the state attorney’s office of suspected financial crimes.

If the Portuguese banking system does not need a capital injection, was the government correct to give it one anyway to keep pace with the rest of Europe? Consider last month’s move by Ireland to guarantee deposits and the consequential flight of capital in Great Britain from English to Irish banks. Does the decision spark moral concerns about a government who moves to give its banks a regional advantage? Do such measures amount to opportunism? Does Portugal have a right and/or an obligation to make sure its banks stay competitive in the region?

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