Portugal’s fiscal plight is dire: but unlike in Spain or Ireland, the country’s banks are not major burdens on the sovereign. Where was the big 2000s Portuguese housing bubble, after all. Right?
No.
Here’s Evolution Securities’ banks analyst Arturo de Frias on Wednesday:
Increasing focus on Portuguese banks’ funding. Portuguese banks still have €42b funding from the ECB, down only 18% from the peak, and still very large given their relative size. By contrast, Spain’s ECB financing has fallen from €130bn last July to €49bn now.
The Portuguese Government has given an April 30 deadline to the banks to strengthen their capital. It seems increasingly likely that they will fail to do so, and the Government will eventually end up having to provide capital. This might trigger the Sovereign bailout.
April is going to be a trigger month for something in Portugal, anyway. Heavy bond redemptions could make it the moment Portugal gives up on borrowing from the market, so the wider problems already facing the country might still bring it down before the banks.
On the other hand, it doesn’t really matter which trigger ends up firing first. Government bond credit risk and banks’ capital have been fusing together in Portugal for a while.
Which is indeed not an Irish or (not quite) a Spanish scenario. Greece, actually.
Obviously, Portuguese banks have been among the biggest buyers of their country’s debt in recent months, as the foreign bid faded away. More sovereign risk = less interbank toleration, much like Greek banks last year. This is all pretty obvious by now though.
What we’d particularly point to is the sovereign effect on bank securitisations, and via securitisations, the supply of assets the banks pledge to secure funding from the ECB. We’ll be waiting Moody’s follow-up moves on banks and covered bonds after its overnight sovereign downgrade, then. Until then, to summarise:
If Portuguese banks lack assets for ECB funding, the analogy lies with Ireland.
If Portugal exposes the vulnerability of securitisation to sovereign risk much more, serious implications lie with Spanish banks.
And if Greece’s austerity bailout threatens macroeconomic pain to securitised assets anyway, the implications for what good exactly Portugal’s bailout will do at all are questionable.
Funny how the periphery all start looking alike in the end. Thank the banks and the bailouts for that, we suppose.
Related links:
Towards the limits of covered bond bank funding… – FT Alphaville
Covering up the capital structure – Deus Ex Macchiato
Bail out Portuguese and Spanish banks together? – FT Alphaville
