Banks and economic growth
Portugal is implementing a difficult adjustment programme that covers three fundamental aspects: fiscal consolidation and the rebalance of public finances, structural reforms and economic growth.
Fiscal consolidation requires strict, painful austerity measures and everyone knows that austerity and growth don't go well together. In the initial phase of an adjustment process, recession and impoverishment are therefore inevitable. This is why these programmes are only possible in a climate of civic understanding, social cohesion, commitment, political stability and active solidarity. In this phase, it is common for there to be a significant transfer of assets to other shareholders and often the loss of decision centres.
The transition from recession to economic growth is powered by structural reforms made in the meantime to reduce context costs and generate gains in competitiveness, which also include reducing personnel costs, improving operating efficiency and the impact of innovation.
The central issue in Portugal is how to speed up the creation of wealth in order to move on to sustainable growth. This is because growth in GDP is essential for balancing public finances (it is the denominator of ratios...), creating jobs, increasing people's and companies' earnings and boosting consumption.
In order to do this, we need business investment capacity and the funding of the economy and companies.
There are different ways of funding companies. It depends on investment capacity and adequate equity, the ability to obtain loans on reasonable terms, recourse to the capital market especially for bond issues and the standardisation of payment times between companies and between the state and companies.
In Europe, 2/3 of companies' funding comes from bank loans (in the United States, 70% is from the capital market). Everyone knows the importance of obtaining loans for the funding of Portuguese companies.
We know that Portuguese companies' debt accounted for as much as 137% of GDP, one of the highest figures in the European Union, close to Spain (138%), followed by the United Kingdom (113%) and France (110%), while in Germany it was only 50% of GDP.
Companies and the state, individuals and banks have therefore needed to reduce their borrowing. On the other hand, in the present situation many of them are facing problems that reflect negatively on their balance sheets and affect their access to credit. Companies must increase their levels of self-financing. Recapitalisation is therefore an essential factor for economic growth.
There are a number of alternatives when the shareholders are unable to do it:
- New shareholders
- Partnerships with other companies for their consolidation or association
- Different types of venture capital (it is hard to explain the low use of this tool)
- Use of innovative instruments and unusual forms of capital increase, such as recapitalisation funds favouring good export companies
- Restructuring of loans with the possible conversion of part of the debt into capital, also reinforcing companies' governance
- Greater use of the capital market
- Inclusion in restructuring funds
The Portuguese banks have shown outstanding resilience throughout the financial crisis, which has lasted for six years now. They are perfectly aware that they must contribute actively and even be the driving force of economic growth, participating not only in granting loans but also helping to make companies stronger. The banks' role is actually irreplaceable in guaranteeing the funding of the economy.
This is why the Economic Adjustment Programme negotiated with the Troika includes a fourth pillar, designed to ensure financial stability and strengthening of banking institutions in order to guarantee the funding of the economy. The measures to be taken are aimed at the banks' solvency and soundness and constitute the central feature of their strategy and management.
The sovereign debt crisis naturally resulted in a slowdown in the growth of the bank's assets and loans.
The growth rate of loans to companies, which increased 7% a year between 2001 and 2008, slowed down to 0.5% from 2008 to 2010 (while in Europe it fell -0.8%) and fell 2.6% on a yearly basis between January 2010 and June 2012.
There are three main reasons for this reduction in loans to companies:
- Economic recession, an increase in defaults and a reduction in demand for loans
- Structural constraints on the banking sector: mandatory deleveraging (credit transformation ratio / deposits fell from 147% in June 2011 to 137.7% in June 2012); liquidity difficulties were mitigated by growing recourse to the ECB, which made the current situation comfortable; capital ratios are stricter than in banks in other European countries; and there are restrictions on the generation of income to restore the capital base (impairments, cost of customer funding, rigid pricing of mortgages and inflexibility in adjustment of the cost base)
- Decapitalised, over-leveraged companies with weak balance sheets, which means that operations do not pass the banks' risk assessment, and lack of appropriate guarantees
However, all companies with acceptable balance sheets will have no problem obtaining loans (for operations, cash flow and investment).
There is no healthy economy without a strong banking sector with a high sense of social responsibility.
The Portuguese banks are now in a more comfortable liquidity situation with high levels of solvency and soundness (the highest ever). They are well provisioned, although with high pressure on their return, and will continue to fulfil their mission of funding the economy.
Fernando Faria de Oliveira
President of the Portuguese Banking Association
Lisbon, 26th September 2012