It has been several months since Banca Monte dei Paschi was saved with taxpayers money to prevent the banking crisis in Italy to spread. Once the rescue operation stopped dominating the headlines, not a single traditional and mainstream media outlet has reported on potential issues in the banking sector. The common man in the street would almost start to think the situation has normalized again. Which isn’t the case.


Unfortunately that’s absolutely not the case, despite the attempts to divert the attention from the real underlying ‘banking’ problem by distributing positive news about Greece and its return to the capital markets.

The fact that the three largest Portuguese banks are sounding the alarm again has gone unnoticed, despite the importance of this update. The three banks are now planning to ‘pool’ their bad loans in an attempt to reduce the amount of writedowns and impairment charges they are forced to report.

The triumvirate will create a special platform which will make it easier for two banks which extended loans to the same corporate entity to ‘manage’ these loans in an attempt to ‘help’ the corporate borrower to get healthy again. This ‘strategy’ actually does sound a bit like the financial community is trying to invent a new category next to a ‘non-performing loan’. Perhaps ‘managed loan’ doesn’t sound as negative as a NPL.

It’s a noble idea to start a ‘bad bank’, ‘just’ 10 years after the other civilized countries pooled the bad loans together in bad banks, funded by the taxpayers and created ‘to protect the wellbeing of the financial system’. And perhaps it’s already too late. Despite recording serious impairment charges in the past few years, the bad loans still make up approximately 15% of the total credit portfolios of ‘the big three’ in Portugal (with only half of the total value having been written down by now.

Source: Novo Banco presentation

Novo Banco undoubtedly is the worst student as approximately a THIRD of its credit portfolio consists of bad loans. That’s a shockingly high ratio and it’s clear that the returns on the ‘good’ 2/3rds won’t even make up for the ‘bad’ third as the pre-tax pre-impairment annual income of Novo Banco would require it to spend all of its profit on covering the non-performing loans for the next 40 (!) years.

All eyes were on Spain and Italy in the past few years and whilst the Portuguese problem remained covered and even though (finally) creating a bad bank might help to reduce the size of the problems, it might be ‘too little, too late’ as it’s not just the corporate sector which needs to turn the ship around. Have a look at the next alarming chart which shows you the household savings rate in Portugal.


Indeed. Whereas the total savings rate was approximately 9% less than 5 years ago, the momentum is clearly trending down with an average Portuguese family being able to now save less than 4% of its income.

Needless to say the Eurozone is bracing for yet another high-impact financial issue. Mark our words. Within the next 6-9 months, all eyes will be on Portugal again as its financial system is on very shaky foundations.

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