Portugal’s Corked Post-Crisis Intentions

Portuguese bond yields topped 3 percent, as Canadian ratings firm DBRS cited “mounting pressures” for joining its three peers in investment-grade demotion at October’s next review. The downgrade would disqualify instruments from the ECB’s buying program without a waiver as in Greece’s case, and raise the specter of another rescue as Lisbon struggles with 1percent growth and banking sector cleanup with government debt at 130 percent of GDP as of last year. That level is triple the “BB” category average and corporate and mortgage credit at risk is near 15 percent of the total. At home milk and meat producers decry industry crises, while abroad exports were down 40 percent in the first half to leading partner Angola, which has turned to the IMF for oil collapse help. Barclays research puts bank recapitalization needs at EUR 7.5 billion, and a deal for one-third that sum was announced for Caixa Geral de Depositos which targets EUR 1 billion from private investors. The lender lost EUR 200 million through mid-year and Brussels confirmed the package did not constitute banned state aid since it will occur “under market conditions,” although demand for the commercial subordinated debt tranche remains elusive. Lingering woes are in contrast with next-door Spain, where after “bad bank” property loan absorption the sector has revived on second quarter 0.8 percent GDP growth, with consumer spending up 3.5 percent and manufacturing investment ahead at double that pace. Government debt is equal to output at EUR 1 trillion, with the first confidence vote in the precarious PP-led party coalition depending on Socialist abstentions for support.

 In Greece, where stocks fell 5 percent on the MSCI Index through August, the central bank pointed out that apartment prices dipped only 3 percent in the first half, the lowest plunge in five years. Private sector bank deposits were also steady at EUR 125 billion, and the state repaid EUR 1 billion in contract arrears in advance of the Syriza party congress. The extreme poverty rate is 15 percent with lingering recession and a 5 percent slide in tourism receipts amid the Mideast refugee crisis. Arrivals from France, Germany and Russia were off double-digits with Syrian war and terrorism fear spillover. Separately international economists have urged a boycott in response to criminal charges against the former head of the statistics agency for inflating budget deficit data. The official was a respected technocrat and the EU found figures were not manipulated in its own investigation. Italy has admitted over 400,000 boat refugees since 2014, and a devastating earthquake killing hundreds will add to budget and banking burdens in advance of a constitutional referendum, with the opposition 5-star movement tied with Prime Minister Renzi’s party in opinion polls. The EU-agreed fiscal target is under 2 percent of GDP, and the non-performing loan ratio has tripled since 2008 to 18 percent, and the country accounts for one-third the Eurozone total. Small-business uncollateralized exposure is steep, and major groups have shed Central Europe holdings to cover holes.  Unicredit’s 40 percent $3.5 billion stake in Poland’s Bank Pekao will likely be bought by state insurer PZU as authorities move to consolidate local control to safeguard political and economic positions.