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Portugal: What next for Portugal?

Date: 15/10/2008

As would be expected, the Government was this week straining itself to find a positive spin on the global financial crisis and its effects on Portugal.

In a bold and swift move, the Prime Minister told Parliament that company tax would be halved (from 25 to 12.5 percent) on the first €12,500 of collectable income and that credit to small and medium enterprises would be boosted to a billion euros, with interest being lower than any national bank.

José Sócrates also said the country would maintain its budget deficit at this year’s current figure (2.2 percent).

While Portugal will remain within the 3.0 percent threshold imposed by the EU on its members to ensure financial stability, it is 0.7 percent above the figure Lisbon proposed to Brussels earlier this year.

But in practical terms, the Government still intends to spend €3.8 billion in 2009 more than its projected receipts – around €1.1 billion above the target it set itself last December.

The Prime Minister also took the opportunity in Parliament to rubbish claims that two smaller Portuguese banks were facing imminent collapse, a position which was later backed up by the association of Portuguese financial institutions.

José Sócrates further praised the European Central Bank’s 0.5 percent rate cut on Wednesday as a "step of the greatest importance" for the bloc’s economy and reiterated his Socialist government’s pledge to intervene at the first sign any Portuguese bank was seriously affected by the international financial crisis, the Lusa News Agency reported.

Besides the EU-wide decision to insure bank deposits up to €50,000, the Prime Minister pledged his administration would "intervene in any justified circumstance to safeguard all bank deposits of the Portuguese".

He said the government would take appropriate action "before any disaster" occurred to "guarantee deposits and impede any bank from facing difficulties", adding the administration had received "no sign" any Portuguese bank was in danger.

The prime minister described the EU Central Bank’s half-point rate cut as "a step of the greatest importance for the European economy", a measure aimed to "restore confidence and energise the economy".

Finance Minister Fernando Teixeira dos Santos, meanwhile also assured the Portuguese that all savings deposits in banks operating in Portugal were "guaranteed" and urged European Union partners to do the same.

Teixeira dos Santos, speaking on the sidelines of a meeting of EU finance ministers in Luxemburg to discuss the international financial crisis, said it was "important" for "the same type of guarantee" to be issued across the European bloc.

Simultaneously, he defended that losses suffered by financial institutions should be "first and above all" supported by bank management.

"I want to assure all Portuguese clearly of one thing: whatever happens, the savings of Portuguese in any bank operating in the country are guaranteed", Teixeira dos Santos said.

"It is important that this same guarantee be given" across the 27-nation bloc "so we can restore confidence in the functioning of our financial system", he added.

The chairman of the Association of Portuguese Banks (APB), João Salgueiro, who is also chairman of BES, agreed with the ECB rate cut, but criticised the organisation for taking too long in taking any tangible action.

João Salgueiro believes that this measure will foremost act to calm the levels of distrust among European financial institutions, ultimately leading to the restoration of trust.

The APB chairman, backing up the Prime Minister, said all Portuguese banks were solid in the face of the crisis, terming any talk of insolvencies as mere "speculation".

"If there really was a problem, something would have already happened in the last few days, such as the intervention of national banking authorities", explained the BES chief.

"There is no reason for panic. But the next three to four years are going to be difficult. My advice to the country is that they postpone non-essential expenses, such as a long distance holiday, as the coming years will not be years of great abundance", warned João Salgueiro.

"As a country, we will have to be more competitive than others, doing more for less, as nobody will be bailing us out", said the APB chairman.

The Governor of the Bank of Portugal shared a similar sentiment of caution, warning that "Portugal is not immune to the crisis".

Vítor Constâncio, predicted that the country will only grow as much as the Euro Zone allows, underlying forecasts issued this week by the IMF.

According to the International Monetary Fund, Portugal will border on technical recession for much of 2009, with economic growth now forecast to be a mere 0.1 percent.

Constâncio, who also sits on the European Central Bank’s governing council, called for continued intervention by governments in their respective national banks to ensure their survival.

"It is important to assure that these state interventions continue" he said this week.

"The most likely scenario is that a certain resilience of the global economy and especially in emerging economies – emerging economies are offsetting technical recession in some developed countries", he added, which could be the case in Portugal, which enjoys strong and enviable economic ties with potential economic powerhouses such as Brazil and Angola.

"Portugal benefits from having a modern and robust financial system, which is positive for our economic development", he explained.

European analysts have also maintained a positive outlook for Portuguese banks, mostly as they have had hardly any exposure to the so-called "toxic assets" which have wreaked havoc amongst many of their European counterparts.

Meanwhile, the EU has presented proposed rules aimed at curbing bank practices blamed for the financial crisis.

Six EU governments have already had to step in to prop up financial institutions, dispelling hope the crisis would be contained in the United States. The rescue plans have been quickly reviewed by the EU to ensure they do not violate rules on the financial support that governments may give to companies.

The bailouts have earned praise from the commission as an example of cross-border cooperation. Along with national governments, the European Central Bank was involved in the negotiations, which the commission followed closely. The ECB has also redoubled its efforts to loosen up credit, granting banks in the 15-nation euro zone €120bn for a 30-day period.

EU leaders plan to discuss the turmoil, which has sent markets plunging, at their meeting in mid-October. Initiatives are being prepared for a response involving structural change, not just short-term measures. Meanwhile, there have been growing calls for a world summit on the crisis, an idea supported by the EU.

The rules proposed concern financial products backed by a pool of mortgages with varying degrees of risk. Banks selling such products would have to hold onto a portion of them, meaning they would bear some of the risk. Institutional investors would have to make more effort to ensure the products they bought were sound. Failure to do so could lead to heavy penalties.

Supervisory bodies would be set up for banks operating in several countries, and banks would be limited in how much money they can lend or borrow from each other. Other proposals concern how to evaluate a bank’s capital and how banks that operate in more than one country fund their daily operations.

To take effect, the proposed rules must be approved by all 27 EU governments and the European Parliament. Source: The Portugal News

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