The future of Portugal definitely lies in collective and individual accomplishment of its citizens, which requires great rigour, clarity, talent and spirit of sacrifice in order to find the most rapid and effective way to overcome the serious issues that  we face.

However, it is sure that since we have joined the European Union (EU), the solutions are not only national, but also European and in the self interest of the EU and other Member States.

The key question is to proceed with the demanding but essential fiscal consolidation, and avoid a recessive spiral by stimulating economic growth.

The application of the Economic Adjustment Programme models to a Member State of the European Union and, even more, member of the Economic and Monetary Union, in my point of view, as a differentiation factor, should be properly complemented with an extraordinary measures package to stimulate investment and recapitalization of companies, economic growth and employment, suitable of a Union based in cohesion, convergence and solidarity. It is well known that austerity and recession intensify the divergence and may put the cohesion at risk. So, solidarity is most needed.

Presentation Slides



Slide 3: Growth estimates: a slow path for Europe

As Commissioner Michel Barnier recently said, five years after the start of the financial crisis in the U.S. (sub-prime), the situation in Europe remains fragile: the European Union would go through a recession in 2012, a decline in product estimated at -0.4% and progressive recovery will have few significance in 2013 (+0.4%).

The unemployment rate in Europe reached 11.6%.

Slide 4: European issues

The current crisis that we are experiencing in Europe follows the intense financial crisis 2008-2009 and was influenced by excessive deficits and debts of many countries, by serious crisis in the financial system of some of these and by insufficient saving rates. European crisis is much more intense in the peripheral countries (which accumulated problems of excessive debt, public and private, caused by "cheap and easy money" that resulted from its presence in the Euro zone, with measures to support the economy arising from the international financial crisis).

But this European crisis and, particularly in peripheral countries is not only a sovereign debt crisis, it also has its origin in unfitted growth models, the loss of competitiveness and low economic growth.

Slide 5: The process of deindustrialization in Europe affected mainly the periphery countries.

Indeed, countries that went further in integration and have followed growth models centred on real economy and in tradable goods were able to obtain significant efficiency gains. Many countries are following a successful route, and it is evident. That is why the European Union as a whole maintains its strength!

The countries most affected by loss of competitiveness, over-indebtedness, and the sovereign debt crisis had to adopt tough budgetary consolidation measures, austerity measures with heavy consequences for the people, that induce a sharp decline in domestic demand and promote recession.

Due to its weight in international trade and the fact that 40% of foreign exchange reserves being denominated in Euros, so the European crisis cannot but affect the rest of the world. The Euro is the 2nd reference currency in the International Monetary System. And the Euro remains strong, despite the sovereign debt crisis.

Faced with this crisis, the EU has taken steps to ensure stability and irreversibility of the Euro, also in order to further improve public finances, and has economic reform initiatives underway which are needed to return economic growth.

It is quite clear that the European Union needs more economic, financial and fiscal integration. But it has been much slower than necessary in its undoubtedly complex, difficult and time-consuming decision process.

The interests at stake often do not coincide, neither from the political nor the business viewpoint, as there will always be donor countries and recipient countries, creditors and debtors, and that democratic legitimacy is a key factor.

The European Council sought to provide a comprehensive response to the problems, focusing on three points:

  • initiatives for a fiscal (budgetary) European integration;
  • a European policy for growth and employment;
  • a strong and consistent financial regulation.

I will focus these last 2 aspects:

Slide 6: European Union policy and budget

  • Regarding vector growth, creating jobs and improving competitiveness, the European Union must:
  • strengthen coordination of economic policies of the Member States, promoting further economic integration
  • define an agenda of competitiveness adjusted to current times of globalization
  • stimulate investment and innovation
  • approve a community budget that responds to the objectives.

The objective of economic integration amounts to, at a business level, in making them increasingly European, i.e., to obtain efficiency gains by locating the various segments of the value chain where it is more competitive to do so by distributing its activity throughout Europe. In fact, the great advantage of the European Union, its great strength, lies in the existence of diverse capabilities, costs, organizational skills, and must take full advantage of the alternative locations of each element of the value chain, by opting those where it is most effective and competitive. This is of huge importance for Portugal that can take advantage of it because it has many competitive advantages, as well as all other Member States, and is far from being explored.

Regarding financial integration, I begin by recalling the huge impact on the European banking system of the sub-prime crisis, toxic assets and the sovereign debt crisis.

The external financing which fuelled the stimulus to spend was channelled through the banking system of each Member State, which got into debt abroad to meet the needs of its customers.

Slide 7: State support to banks during the financial crisis 2008-2010

Toxic assets that many banks then accumulated, plus the lending of poor quality credit (when oriented towards projects without profitability), led to the need for unprecedented state support to several EU banks, and to implement strong measures to strengthen the regulation and banking supervision to make the financial system more stable and reduce risks.

Note that Portuguese banks were among the most resilient and required less public support throughout the EU during the crisis 2008-2010: they did not use any facility to increase banks' capital and the use of state guarantees was of the lowest in the Euro zone (3% of GDP).

Slide 8: Core vs. periphery countries: competitive disadvantages

However, the financial crisis has put a brake on the process of financial integration in Europe and there are risks of further fragmentation with the increase of the sovereign debt crisis.

Note the importance of financial integration for economic growth: the interest rates applied by banks declined 70% on average in Europe, when compared to those prevailing in 1990! Although it is difficult to quantify, the low interest rates charged to companies contributed to the increase in investment, employment and growth, benefiting all European economic agents.

In a monetary union, monetary conditions are expected to be homogeneous, uniform in all states. But reality shows that the Monetary Union is currently fragmented and each Member State is subject to specific monetary conditions - liquidity, interest rates, credit conditions - much more burdensome in countries most affected by the sovereign debt crisis. For example, the interest rate charged to firms in Portugal is much higher than the equivalent in Germany.

Slide 9: Borrowing from the ECB

There are increasing differences in wholesale funding and in retail interest rates between Member States.

The financial crisis has brought the shortcomings in the functioning of the European Monetary Union to light, and increasing political, legislative, regulatory and structural initiatives try to correct what prevents the proper functioning and goals that outline the creation of the MU. The Banking Union, the Fiscal Union, an effective coordination of Economic Policy and a "lender of last resort" Central Bank are essential to normalize the situation, along with numerous initiatives to strengthen the solidity of the financial system and prudential and banking conduct supervision.



Slide 10: Budget deficit: commitment to fiscal consolidation

As we all know, Portugal is undergoing its Economic Adjustment Programme (EAP), which has four key issues - budgetary consolidation and rebalancing of public finances, structural reforms and strengthening of the financial system, to ensure the financing of the economy.

Promoting economic growth is also on the objectives under EAP.

In a nutshell, it can be said that we have been constrained by the process of fiscal consolidation, and particularly in the initial phase of the programme, by the deleveraging of the banking sector and companies, but we should seek to quicken the way from the inevitable recession to economic growth, with specific stimuli.

The sixth evaluation of the programme has just been carried out by the European Union (Commission and ECB) and IMF bodies.

I would like to highlight some steps from the Joint Statement:

“The programme is broadly on track, despite stronger headwinds. With much already accomplished, strong commitment and perseverance need to be maintained as the programme enters its second half. External and fiscal adjustment continues to advance, adequate capital and liquidity buffers have reduced financial stability risks, and structural reforms are proceeding apace. At the same time, rising unemployment, lower incomes, and uncertainty are weighing on confidence, while the recession in the euro area is beginning to bear on export dynamics. (...)

While downside risks to growth are significant, the programme’s macroeconomic framework remains appropriate. (...)

After a 3 percent decline in 2012, real GDP in 2013 is projected to decline by 1 percent (...)

Fiscal consolidation efforts are in line with the revised deficit targets for 2012 and 2013. (...)

Policy efforts to improve financing conditions for viable firms have continued. (...) While deleveraging in the banking system is proceeding on pace (...)

Fostering a more competitive economy remains imperative. (...)

Overall, the review confirms that solid progress is being made. A broad political and social consensus continues to be an important asset for the success of the programme.”

This statement is in line with the significant gains in image abroad, both in political centres and market perception, since clear progress has been made in fiscal consolidation (particularly in reducing the primary balance and public expenditure, the balance of payments based on the outstanding performance of exports and emigrants' remittances) in some structural reforms and in the stability of the financial system, as well as by re-access of several companies and two banks; first BES, then CGD, to debt markets.

However, internally, the social climate is usually of great concern and discomfort.

Admittedly, as the people felt the austerity measures, it was normal to have "a heavy atmosphere". It is what is called "adjustment fatigue".

The recent austerity measures, foreseen in the 2013 budget, which indicate a strong increase in tax burden and still not much in the reduction of public expenditure, and the negative outlook on economic growth increased the level of concern.

We all know that times are extremely difficult and extraordinarily complex, marked by the need to change “lifestyle". Everyone is called to collaborate in addressing the serious problems we face, with the elites having greater responsibility, being more apt, with the ability to understand the scale of the issues and help to overcome and mobilise all for this complicated task.

More than in other crisis situations we've been through, great skill, foresight, common sense, creativity and realism is needed, along with a demand of emotional intelligence, aimed more at returning hope than creating a climate of hopelessness or anger, often fuelled by pure speculation and dispute, without any argument or credible alternative proposals viable.

The serious situations of many Portuguese and the sacrifices they are making, the state of worry many others have for their future cannot be ignore, which further accentuates the duty of national institutions to serve the citizens and our country. And so begins the obligation to provide accurate information, comprehensive, timely provided, as the only way to clarify and avoid destructive and absolutely unrealistic speculation.

I do not see any alternatives more favourable to Portugal than to promote economic growth along with the implementation of an adjustment programme involving fiscal consolidation, and therefore austerity, and restoring competitiveness to accelerate the transition to growth and employment. The country needs undoubtedly institutional funding that gives us the time needed to return to the markets.

Leaving the Euro would have unbearable costs, much more intense than that of the EAP, and take us away from any path that would allow us to re-converge in a reasonable period.

Requesting a debt restructuring, with more or less high haircuts, would result in a serious negative impact on assets and would take us out of the market for decades and perhaps would be a big setback and involve higher costs for the Euro Area.

Breaking with international commitments, as in non compliance, would not only be a disgrace and a shame, it would penalize us for decades in normal use of the markets. This is out of the question.

It remains for us, therefore, to undergo the Economic Adjustment Programme, seeking as far as possible degrees of flexibility and adjustments and / or additions to existing agreements. As it has already happened in the course of its implementation.

The implementation of OE/32013 whose macroeconomic basis can, as has been recognised, be optimistic, imposing the adjustment in tax burden (which may be reaching the social and affordable limit for families and businesses, and whose sustainability raises questions, as the already poor performance of tax revenues shows), is very difficult and risky.

But, what are the alternatives?

Budgetary consolidation can be done by means of cutting public expenditure and by the growth of revenue, normal and extraordinary.

The total public expenditure comprises the primary current expenditure, capital expenditure and interest.

The primary current expenditure is highly concentrated in staff expenses into four main areas: Social Security, Health, Education, and all that stems from security, consisting of Defence, Justice and Police.

Any action in these areas would be accompanied by opposition and protests, that it is undermining the welfare state, but the truth is that there are no miracle cures, we must be realistic and lucid. Which would be preferable, solutions of this nature, somehow configuring the user / payer model, or bearing the tax burden?

The project called "Rebuilding", comprising the reduction of public expenditure and accelerating structural reforms, with a focus on Public Administration, if it fails for a reason it might be the fact that it should have been started earlier...

There is the other component in total public expenditure, where the scope will depend crucially on the availability of the European Union, the IMF and investors, and that has to do with the financing maturities and interest, that in contrary to what is desirable, will increase. Only the renegotiation of conditions, namely the funding maturities and the eventual possibility of speeding up the process that will provide for the pooling of sovereign debt within the EU, as well as good performance in secondary markets, would reduce these expenses.

A very important observation arises when referring to another idea that has been conveyed, the need for more time to achieve the targets of budgetary consolidation. The external financing is the active constraint which affects the formulation of economic policy.

"Any postponement of adjustment implies new financing needs (that are not secured) and a worsening in the problem of unsustainable debt, with consequent additional loss of credibility."

While many speak the advantage of slowing down and extending the period of fiscal consolidation, citing the enormous effort from taxpayers and the risk of a negative spiral between fiscal consolidation and recession, and / or to request more funding to cover not contemplated needs, their effects must be will properly evaluated.

There is another differentiating factor that has been appreciated and emphasised by the markets on an international level, whose importance should be noted.

In actual fact, the implementation of the strict and harsh austerity programme, requiring strong sacrifices from citizens, has to be done in an environment in which there is:

-   civic awareness that the country needed external support, that it would fulfil its commitments, that temporary impoverishment was inevitable;

-   a cohesion and social peace in which discontent and protest do not undermine it, the Portuguese revealing a high sense of responsibility shaped in an agreement of social dialogue in force;

-   a consensus and a political compromise between the ruling coalition and the Socialist Party (PS), in opposition, in the implementation of the Economic Adjustment Programme, negotiated and signed while this party was responsible for the Government.

I consider it indispensable and almost a requirement of civil society, to intensify the dialogue between the governing coalition and PS, to agree to the terms of the Project Rebuilding (Public Sector Reform), because it is unavoidable. Opening is necessary, essential commitment, an agreement, a pact that would allow us to obtain the best and most consensual results. It is not acceptable to say no to everything when we are in a state of vital necessity. And a political crisis is not, in this severe context we are going through, acceptable, due to the damage that may result.

Slide 11: Challenges for the Portuguese recovery

However, the central issue of the crisis our country is going through is of economic growth. In itself, and also because GDP is the denominator of all ratios: the more it grows, it requires less reinforcement of measures on the numerator, the more it decreases, it requires more efforts and measures to activities represented in the numerator. The trajectory of public debt ratio is decisively influenced by economic growth.

It is known that austerity and growth are not reconcilable. Thus, a first stage of a process of adjustment, recession and impoverishment are inevitable. During this stage, there is often significant transfer of assets to other stakeholders and, in many cases, loss of decision-making centres and significant loss of richness.

The transition from recession to economic growth is enhanced by structural reforms undertaken in order to reduce the costs of context and generate notable gains in competitiveness, which also include the reduction of personnel costs, improving efficiency and the impact of innovation. But structural reforms do not have immediate results.

A key issue in our country is how to accelerate the creation of wealth that allows movement towards sustainable growth. The growth of GDP is key to achieving the rebalancing of public finances and to create employment, increase income of citizens and businesses, boost consumption and savings.

Slide 12: Ease of doing business rank for small and medium enterprises - I

What determines economic growth? Not only capital and labour. Growth requires knowledge (a national system of knowledge comprising of education, innovation, Research and Development, and training), requires a favourable institutional framework (based on values, relationships of trust, a social capital open to dialogue about the rules governing economic activity) and, most notably, entrepreneurship, in part stimulated by a favourable context.

We know that economic growth is the ultimate goal of the programmes, but assume that they are structural reforms and corrective measures for improving the competitiveness of economies. But what is absolutely essential is investment.

Slide 13: Ease of doing business rank for small and medium enterprises - II

The situation of countries with adjustment programmes entails very intense competitive disadvantages relative to other Member States: financial and capital markets constrained, more significant tax burdens, shortage of capital, depressed domestic markets. All this tends to create an unattractive framework for investment.

I have defended, therefore, that this would fully justify the creation of a Special and Temporary Programme to support growth and employment, possibly using cohesion funds, structural funds, "project bonds", EIB financing in order to support the financing of companies, through the relaxation of rules on the use of funds.

We already know how difficult discussion is on the Financial Perspective and Budget of the 2014-2020 Commission, with several Member States to allege internal problems and seek to limit its effort. We also know that the distribution of the "pie" now covers many more Member States, so that the distribution will be more difficult. But it would make sense to create such a mechanism, which would complement the adjustment models generally followed in any country not belonging to an Economic and Monetary Union.

On the other hand, our agenda for growth is a pressing need, and I note with satisfaction the measures announced by the Minister of Economy, targeting investment, growth and employment.

Despite the difficulties of the situation, our country has progressed remarkably in the last 20 years. We now have a higher scientific, technological and management capacity, a higher skilled workforce, excellent infrastructure, several examples of success in innovation and technology. Our entrepreneurs have been able to react and give an excellent response to adversity, turning increasingly to foreign markets. The Portuguese banking sector has a very favourable benchmark being penalized by the rating of the Republic.

It is desirable to find a solution to the competitive disadvantages that triggered the crisis, seeking to eliminate apparent contradictions. For example, adopting a framework, perhaps contractual, of tax benefits to attract investment and job creation.

It is essential to attract investment, both foreign and domestic, taking advantage of improved competitiveness resulting from structural reforms with effect in the medium and long term, improvements in efficiency made to companies and the depreciation of the real exchange rate in the short term.

Note that, belonging to the Euro zone, we have no room for manoeuvre as regards to the nominal exchange rate, but there has been an internal devaluation through wage cuts, increased taxes on consumption (not yet, as it could be used, from the reduction of taxes on labour).

Slide 14: Exports as a source of growth

Still on growth, I will only add that, as it is consensual, a growth strategy for the Portuguese economy has to focus on the tradable sector of the economy, on exports in the broad sense. The excellent performance of the export sector of goods and services went from 30% of GDP in 2010 to nearly 35% this year. But in countries like our own, exports represent values almost always above 50%.

Slide 15: Diversification of markets

The state, which is responsible for a catalytic role of structural transformation, should primarily promote institutional and macroeconomic conditions favourable for investment.

But in times of crisis as we are in, it is essential to have a mobilizing strategic plan.

I still believe in the indispensability of strategic thinking. Simply leaving the market to determine the future does not seem well-advised. Neither the U.S. nor Germany have done this. The idea I uphold since the beginning of the 90s corresponds to the profile of Portugal – we should be in Europe,  similarly to how Florida is in the U.S., a cluster that I would designate a cluster of well-being (tourism and residential tourism, health, leisure, culture industry , food distribution, etc..), a cluster of sea industries, and towards new technology, agribusiness, including wine, maintaining the automotive sector cluster, the traditional industries of quality and added value, and always open to innovative enterprise initiatives. There is no doubt that the reindustrialization of the country, mainly the one mentioned before, of further integration in the value chain of European production would make sense. I often remember that in 1995, we had not only balanced accounts: public debt accounted for 60% of GDP (now almost 120%). The net external debt was 8% of GDP, more than 90% today. The savings rate represented 22% of GDP, half today. The Foreign Direct Investment was geared mainly to strong re-industrialization, for the introduction of new clusters, like the automobile, for the upgrading of traditional industries, and not only for motorways. We lost, of course, weight in agriculture and fisheries, we would not have gone so far in human resources skills, but we did not just improve infrastructure. The banking sector was privatised, strengthening it, and several industrial companies. The internationalization of companies began. There was a strategy.

But this growth profile has to be complemented with the undeniable advantage that Portugal owns and that is a huge plus for European Union – the atlanticism, the Portuguese speaking world, the relationships with Africa, Latin America and China, that must be optimized.



Slide 16: Main aspects of the Portuguese banking sector

The Portuguese banking system has shown great resilience throughout the crisis 2008/2010 undergoing a strong programme of deleveraging with the onset of EAP and then a process of recapitalization.

The Portuguese banking sector is solid, well provisioned, presenting a CORE TIER 1 ratio of 11.1% in September 2012.

There has been a gradual improvement in the composition of the overall solvency of the system, as a greater proportion of the higher quality component (CORE TIER 1).

With regard to the capital increase carried out by two private banks, with recourse of the EAP Fund, and by CGD through the direct capital injection from the shareholder State, in any case to meet the demands of the EBA concerning the establishment of buffers for sovereign debt exposure, both carried out under the figure of "direct aid from the state", I can not leave without a reference to the exorbitant cost paid by banks (a rate of return on CoCos between 8.5% and 10.25%), by virtue of a blind interpretation of competition rules by the Directorate-General for Competition of the European Commission, based on the fiction that the Single Market is functioning normally, when reality shows, in our case, there are no foreign banks wishing to lend to Portuguese companies! Help? The result is a serious loss to the Portuguese economy, for our businesses, that nobody benefits from.

With regard to liquidity, the situation of the banks is comfortable, the banks having reduced differential between credit and deposits significantly. For the eight largest banks, the transformation ratio is 124% in September 2012. The good evolution of deposits remains one of the key factors for system stability.

The ECB funding accounts for about 12% of the resources of Portuguese banks and represents about 5% of the liquidity provided by the ECB (the normal share of Portuguese banks would be 2.5%). The collateral available has increased considerably and is comfortable.

Impairments and falling net interest income have been the main source of pressure on the profitability of the sector, reflecting the sharp deterioration in credit quality and the need to safeguard the coverage of overdue loans on the balance sheet and the cost of resources.

In short: the banking sector remains under pressure by the deterioration of credit quality, but the banks are robust and well prepared to cope with difficulties.

A final mention of the great challenges facing the Portuguese banking system, and let me repeat, one of the most modern in Europe.

The European financial system and, the Portuguese naturally, is living a moment of deep change, leading to a new paradigm for the sector.

This is characterized by a genuine regulatory revolution, technological, behavioural, and by major changes in business models. In fact, banks are making significant adjustments resulting from adaptation to new market circumstances.

Banks will firstly focus on funding, in asset quality, in the control of impairments, in capital consumption and on efficiency, looking to increase revenues and reduce costs, and in internationalization.

In summary, the Portuguese banking sector has scrupulously fulfilled their responsibilities, showing a remarkable ability to modernize over the last decade and a notable resilience in the face of very difficult situations, which will have its 5th consecutive year.

Portuguese banks will continue to contribute to financial stability and fulfil their irreplaceable mission to finance the economy.

And in this crucial time, when we need investment, stronger and recapitalized companies, the banking sector will be ready and will do everything to be the engine of the economy.

Slide 17: Conclusion

Rigour, spirit of sacrifice, solidarity, dialogue, capacity for negotiation, internally and with the European Union, are my wishes for Christmas 2012.

Fernando Faria de Oliveira

President of the Portuguese Banking Association

Lisbon, 5th December 2012