“Portugal Reforms Not Gone Far Enough to Ensure Financial Solidity”


In September 2015, we wrote China? Oil Prices? Saudi Arabia? Iran? Why Volatility? The Grand Surprise Part II where we said “the depth of European Banks’ illiquidity and careless lending policies” as a likely catalyst for the worldwide economy’s collapse. The Financial Times article below brings home the current level of risk in the Portuguese banking system.

Asher Edelman

Portugal reforms not gone far enough to ensure financial solidity

by Tony Barber, Europe Editor

Sep. 7, 2016


As Portugal emerged in May 2014 from a three-year, €78bn EU-International Monetary Fund bailout, unsentimental central bankers in Lisbon had words of caution for the hard-pressed Portuguese people.

Despite having escaped the disaster of crashing out of the eurozone, Portugal had not reformed itself enough to ensure lasting economic and financial success, they said.

Two years and four months later, the Portuguese central bank’s assessment appears to have been correct in every important respect. Portugal is at the centre of a perfect storm of meagre economic growth, falling investment, low competitiveness, persistent fiscal deficits and an undercapitalised banking sector that owns too much of the nation’s sky-high public debt.

Grappling with these challenges is a minority Socialist government, propped up in parliament by the far left. In the eyes of Portuguese business, the government is inclined more to crowd-pleasing anti-austerity measures than to reforms aimed at improving public sector efficiency and encouraging investment. The question is whether Portugal’s troubles will make a second financial rescue unavoidable.

Read more


The Brits Were Visionary

eu break2

I am attaching an article from the New York Times on the EU and the likelihood of its dissolution. Serious banking restructuring, forgiveness of sovereign debt and fiscal stimulation are required to save the EU experiment. The rich countries, such as Germany, will benefit from such an approach. A collapse of the EU will cost Germany dearly as approximately 50% of its exports go to its EU partners. The time of reality testing for the richer nations is here. Otherwise we face the break up of the EU and massive recession worldwide. How do we awaken the sleeping governments? The U. S., which seems involved with all world issues should probably focus with its EU allies on assisting in the needed solutions, much more meaningful to America and its people than all the Middle East and other wars we are fighting. Helping the EU will also be less costly than the various expensive warrior activities.

How a Currency Intended to Unite Europe Wound Up Dividing It

by Peter S. Goodman–NYT

Were there warnings when the euro was begun that maybe it wasn’t such a wonderful idea?

Yes, but it was mostly Americans, and that may have colored the reaction to it: “Oh, you don’t understand the value of the European project.” But the criticism was not that we don’t agree with the European project, but that you were undertaking something that will undermine the European project, because it’s not going to work. Their answer was, “We will create institutions as we go along.” A lot of people pushing for this were not economists.

You blame the euro for widening economic inequality. How has this played out?

The idea was that for the euro to work, the countries had to converge, and they formulated these ideas called the convergence criteria. They put enormous pressure on the countries to keep their deficits and debts relative to G.D.P. down. That was viewed as the necessary and almost sufficient conditions for making the euro work.

Several of the countries that went into crisis, Spain and Ireland among them, actually had a surplus before the crisis, and a very low debt-to-G.D.P. ratio. But they still had a crisis. That tells us an important lesson: What the people who were behind the creation of the euro thought was going to be a critical condition was not.

The disappointing thing was that after the crisis, they didn’t learn a lesson. What they did was double down on that same recipe — austerity. The structure of the euro was at fault, and the policies they enacted amplified the structural deficiencies. The result was that the countries diverged.

In your telling, Germany has imposed austerity across Europe out of faith in a discredited economic idea, the notion that if policy makers concentrate solely on preventing budget deficits and inflation, the markets can be counted on to deliver prosperity. A lot of your book is devoted to demolishing this idea. Does the German elite still really believe in this philosophy, or is something else at play?

I’ve visited Germany often, and I’m shocked about how strong the belief is in this view that has been totally discredited elsewhere.

But the policies are mixed together with interests. When the Greek crisis broke out in 2010, what was really at risk were German and to some extent French banks. And there was an enormous bailout that was called a bailout of Greece but was really a bailout of German and French banks. Most of the money went to Greece and then right away went back to Germany and France.

When you look at other aspects of the program, you see that it is also helping special interests within Europe.

How so?

Let me give you an example of one of the really absurd things they did. They demanded that Greece scrap a rule that fresh milk is no more than four days old. If milk was older than four days, it needed to be labeled.

Of all the things that were going on, why would you have a debate about that?

The German and the Dutch dairy industries wanted to ship their factory-farmed milk across Europe and sell it to Greek consumers. That would devastate the small Greek producers. Here was something that could only be seen as benefiting special interests in the eurozone and actually weakening the Greek economy.

You argue that some European leaders secretly welcomed mass unemployment as a means of adjusting to the crisis because this was the only way they could see to spur investment — lowering wages. The strictures of the euro took other options off the table: Crisis countries could not let their currency fall or lower interest rates or expand government spending. Was unemployment really embraced as a fix?

They wanted to break the back of workers. Their view was that workers needed to accept a wage cut and we are going to change the bargaining rules to make it more difficult for them to resist. And if we need to add on a little dose of unemployment, well, that’s unfortunate.

Doesn’t that goal predate the crisis?

It’s very clear that the euro was a neo-liberal project in its construction. Employers like low wages. They have broken the back of the unions in many of the countries of Europe. They would view that as a great achievement.

The whole point of the European project has been to get past the hostilities of World War II and build a sustainable community. Yet, in your telling, the euro and the policies delivered to preserve it left much of Europe nursing fresh grievances. How are these grievances coloring politics?

The most important divergence is between creditor, Germany, and debtor, the rest. The criticisms that you hear in Greece of the Germans, they are reliving the horrors of World War II; the criticism in Germany of the Greeks, saying that they are lazy even though the number of hours that they work per week is higher than the Germans’. The flinging of accusations, whether true or not, has been enormous and the divisiveness has been enormous.

We just saw Britain vote to exit the European Union — in part, a reaction to the sense that the European Union is a place of weak economic growth and poor leadership. In Italy, the so-called Five Star political movement is gaining support with calls to abandon the euro — in part, a backlash against German-led austerity. Is there any evidence that these sorts of events are leading to a re-examination of the economic philosophy guiding Europe?

I wish that were happening. Unfortunately, what I’ve seen is almost the reverse. It’s doubling down on a failed experiment. It’s a hard-line approach in which the European leaders in response to Brexit, people like Jean-Claude Juncker, who is the head of the European Commission, have said, “We’re going to be very, very tough on the U.K. because we want to make sure that no other country leaves.

To me that was shocking. You hope that people want to stay in the E.U. because it’s delivering benefits, because there’s a belief in European solidarity, the belief that it’s bringing prosperity. He’s saying the only way we are going to keep the E.U. together is by the threat of what happens if you think about leaving.

You conclude that the best-case scenario from here is to reform and save the euro. But absent that, you contend that it is better to just scrap it as a failed experiment. What needs to happen to make the euro viable?

A banking union with deposit insurance. Something like a euro bond. An E.C.B. that doesn’t just focus on inflation — you want it to focus on employment. A tax policy that deals with the inequalities. And you have to get rid of limits on government deficits.

What’s your sense of what will actually happen?

It is hard to believe that the muddling-through can continue for another five years. Greece is still in depression, no better than it was a year ago. The likelihood is there that in one country or another there will be enough support for another referendum, and an exit will occur. That will begin the process of a real unraveling of the eurozone.


European Banking (Portugal)


Yesterday, Patricia Kowsmann published the attached article on the Portuguese banks. I wish it was as good as Patricia described.

The facts are:

With one exception all of the Portuguese banks including Caixa Geral, the government owned bank, are technically bankrupt and insolvent. They have not yet written down most of their nonperforming loans nor the owned properties acquired through default.

Caixa, as a result of cronyism and poor management sits on debased assets, many of which came out of the Ricardo Salgado fraud and embezzlement of the Espirito Santo Bank and his cozy relationship with the government and the Caixa. We estimate that to be made whole, after realistic write-downs and accounting, the government bank, Caixa, will require a capital injection of between 5 and 10 billion Euro, not the 2 billion Euro the Wall Street Journal suggests.

Novo Banco, the good bank exiting from Banco Espirito Santo, the primary victim of the Salgado embezzlement, has already received a 4.9 billion Euro injection and will certainly need another 3 billion of capital to survive. It’s management has been pulling hard to survive the bank’s crisis but Salgado hit it hard with fraudulent and croniest transactions. Each day there are new discoveries of worthless assets. The Portuguese government will not only loose the 3.9 billion Euro it has put in to the bank but will be required to guarantee a buyer against substantial additional losses (in the billions) if the bank is to be sold.

The story goes on–most of it in Patricia’s article.

Portuguese Banks May be Brewing a Perfect Storm

by Patricia Kowsmann–WSJ

LISBON-Portuguese banks have been excluded from a European Union stress test release Friday, but that doesn’t mean investors shouldn’t be worried.

A slew of problems in the country’s largest lenders-from capital requirements at state-owned Caixa Geral de Depósitos SA to a difficult sale of the “good bank” that resulted from the collapse of Banco Espírito Santo SA-have raised concerns that Portugal could be in trouble again soon.

In a report released Wednesday, Moody’s Investors Service called Portugal’s banks, which are faced with low profits and souring loans, “among the most weakly capitalized institutions in the euro area.” That, Moody’s said, not only represents a major threat for a country whose debt is already too high but also limits growth prospects for the struggling economy.

“For the state, the weakness of the banking system forms a key liability,” it said.

Trouble in Portugal’s banking system is neither unique nor surprising. Across Europe, banks’ profits are being challenged by low interest rates, political and economic uncertainty, and new technologies that are making the old banking model obsolete. Since Portugal requested a three-year €78 billion ($87 billion) bailout in 2011, two lenders-Banco Espírito Santo and Banco Internacional do Funchal SA-have collapsed. In both cases, regulators found that risky lending took place.

A weak economic environment has rendered highly indebted companies unable to repay loans. Corporate debt stood at 110% of gross domestic product last year, according to the International Monetary Fund. The Portuguese central bank said total loans at risk of default stood at 12.2% as of end-March, but Moody’s said the figure seems overly optimistic.

Now, the piling-up of bad news for some of country’s largest lenders is generating what could become the perfect storm.

The government is currently negotiating with the European Commission and the European Central Bank a capital injection into Caixa Geral de Depósitos, the country’s largest lender by assets. Analysts say the bank could need over €2 billion, and because it will be the state pumping in that money, the country’s debt, already close to 130% of GDP, will rise further.

“Hence, any further debt increase to fund bank recapitalizations is a credit negative for the sovereign,” Moody’s, which already rates Portugal’s sovereign as junk, said.

Meanwhile, Novo Banco SA, the “good bank” created from the collapse of Banco Espírito Santo, is posing problems. Novo Banco received a €4.9 billion capital injection from the state and domestic banks when it was created, and it should have been sold last year for at least that amount.

The sale, however, was postponed after the central bank struggled to find good offers. The lender also needed more capital and its portfolio of souring loans turned out to be larger than previously thought. A second sale effort is currently under way, and four parties bid for the lender last month.

The Portuguese government has said it is expected to be paid back for the €3.9 billion it injected into the lender, which means likely losses from a sale will have to be split among domestic lenders already struggling to turn profits.

Earlier this week, Fernando Ulrich, the chief executive of Banco BPI SA, one of the better-off lenders, said healthy banks are being unfairly burdened by the mistakes of others.

“Enough of collective solutions that throw on us and our shareholders the costs of other people’s mistakes,” Mr. Ulrich said.

The executive has been critical of an idea being mulled by the government and Portugal’s central bank to create a system-wide “bad bank” to free lenders from souring loans. But such a solution could prove tricky given the transfer of the assets would create deeper capital holes at banks.

BPI is facing its own life-changing moment after the ECB told it in late 2014 to either raise a prohibitive amount of capital or shed its highly profitable Angolan unit after its exposure to the former colony’s debt exceeded regulatory limits. The issue is yet to be resolved. The lender is currently subject to a takeover attempt from its largest shareholder, CaixaBank SA.

Meanwhile shares in Banco Comercial Português SA, the country’s second-largest by assets, have fallen over 60% in the year to date on fears that it too may need more capital. Its fully-loaded core tier 1 capital ratio-a key measure of a bank’s balance sheet strength-stood at 10.1% in the first quarter compared with an average for European banks of 12.3%.

According to Barclays, if the lender were to improve that figure to 11%, increase its coverage of nonperforming loans and repay €750 million it owns the state, it could require a capital increase of about €2 billion.

“While the bank could seek to bridge this gap through earnings, asset sales and private sector equity raising, these options seem particularly challenging in light of current market conditions and relative to the current market capitalization of the bank at around €1 billion,” Barclays said recently in a note.

Banco Comercial Português said it would voluntarily disclose results from the European Banking Authority’s stress test Friday night along with its second-quarter earnings.

The EBA will only publish the results of the 51 largest lenders in the EU, none of which are in troubled Portugal.


Eurozone Banking

We have often written of the difficulties of the Eurozone Banking System (See China? Oil prices? Saudi Arabia? Iran? Why Volatility? The Grand Surpise Part Two, January 12th 2016, Octavian Report Interviews Asher Edelman, March 3rd 2016, Brussels Proposes “Guillotine” to Stabilise Failing Banks, May 16th 2016, the State of the World Economy, June 10th 2016, BREXIT – the Economics, June 27th 2016) and its ultimate effect on the world economy. Today, in the Financial Times, there appear two quite interesting articles, not all inclusive but interesting.

European Banks brace for downturn with more cost cuts

EU bank

by Martin Arnold and Laura Noonan

European banks from Barclays to BBVA are launching another round of cost-cutting as they brace for conditions to deteriorate this year, due to low interest rates, the UK vote to exit the EU and the latest stress test results.

Barclays has shed 11,000 of its 130,000 staff since Jes Staley took over as chief executive in December through a hiring freeze and the closure of its operations in nine countries, mostly in Asia.

The UK bank aims to lower its headcount to 80,000 after selling its African operation, which employs 40,000 people.

Spain’s BBVA is shedding at least 1,500 jobs, just over 1 per cent of its total staff, mostly to complete integration of the CatalunyaCaixa acquisition two years ago.

Italy’s UniCredit is drawing up plans to slash costs with a fresh restructuring that is expected to result in many job losses among its 143,000 staff. Other banks, such as France’s Société Générale and Lloyds Banking Group in the UK, are also cutting thousands of jobs.

The moves underline how Europe’s banks are grappling with the toxic cocktail of sluggish economic growth, downward pressure on interest rates, rising regulatory pressure and political uncertainty because of the Brexit vote in the UK.

“When you think about this quarter, it is going to be less about the results and more about the outlook, with particular focus on the impact of Brexit,” said James Chappell, banks analyst at Berenberg.

Analysts have already cut their consensus estimates for 2016 earnings per share of the 70 biggest European banks by more 30 per cent since the start of the year.

But Mr Chappell said the focus would now be on whether they needed to also cut their 2017 forecasts, which foresee a 23 per cent rise in average earnings for European banks next year. “It is very hard to see how banks will deliver on that,” he added.

As Italy scrambles to find a way of supporting its banking system, analysts will also be closely watching the results of the latest European stress tests of the continent’s biggest lenders when they are released on Friday.

After the big US banks mostly reported lacklustre growth in investment banking in the second quarter, their European rivals including Deutsche Bank and Credit Suisse, are expected to report at best a modest rebound in fixed income trading income.

“Like US peers, European banks are likely to beat fixed income expectations – the bar is low,” said Kinner Lakhani, banks analyst at Deutsche Bank. “However, to get a franchise re-rating requires sustainability and improving returns.”

Portuguese banks face potential big losses


by Peter Wise in London

Portuguese banks, already undercapitalised and loaded with bad debt, are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo.

Estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9bn to €3.9bn. Some bankers are even doubtful that the rescued lender will attract any acceptable offers, leading to its possible break-up or liquidation.

The sale of Novo Banco is among critical decisions that will shortly determine the future shape of Portugal’s banking industry, which the International Monetary Fundhas linked with the problems facing Italian lenders as among potential risks to global growth.

Lisbon and EU authorities are locked in tough negotiations over plans to recapitalise state-owned Caixa Geral de Depósitos, Portugal’s largest bank, with conflicting estimates of its capital needs ranging from about €2bn to €5bn.

The Bank of Portugal and Lisbon’s eight-month-old “anti-austerity” government are also calling for a “systemic solution” to deal with more than €30bn in bad debts and problem assets, adding to other calls for public bailouts of troubled EU banks.

In a recent report, Barclays estimated that Portuguese lenders could need up to €7.5bn to resolve a “systemic banking crisis” that was bringing the country under “close market scrutiny.”

Investors fear the capital needs of banks could further burden the public finances of a struggling country already facing potential EU sanctions for failing to meet deficit targets.

“Some banks are in need of a large capital injection,” said Antonio Garcia Pascual, chief European economist with Barclays. “This means any material losses from the sale of Novo Banco could end up having to be met by the sovereign, as the capacity of Portuguese banks to absorb them is rather limited.”

Portugal’s second attempt to sell Novo Bancohas attracted four offers. The central bank has not yet identified the candidates, but Lisbon bankers have listed Portugal’s Banco BPI and private equity firms Apollo Global Management, Lone Star Funds and Centerbridge as among those potentially interested.

Apollo reached the final stage of the first attempt to sell Novo Banco, but the Bank of Portugal last September rejected all three shortlisted bids.

The central bank is expected to make an announcement next month on the progress of the second auction, although EU authorities have extended the official deadline for completing the sale by a year to August 2017.

Eduardo Stock da Cunha, Novo Banco’s outgoing chief executive, has warned of potential big losses on the sale, drawing a comparison with Millennium BCP, Portugal’s largest listed bank, whose shares have dropped more than 60 per cent this year and which has a market value of just over €1bn.

“Portugal has to be realistic about Novo Banco when BCP is trading at a price/book value of around 0.4 and southern European banks in general at 0.5,” said a Lisbon banking analyst.

Of course the damage is considerably greater than these articles indicate. The entire banking systems of Germany, France, Italy, Portugal, Greece and Spain are in a state of total disarray, a situation that continues to be systemically threatening to the world’s economies more so as the EU continues to “kick the can down the road.”



Better Practices on Art Insurance


As a consignor:

1) Best to include a clause holding the consignee responsible for damage or loss should his/her insurance company fail to settle any claim within 45 days.

2) Make sure the consignor is additional insured and loss payee.

3) The Certificate of Insurance should be committed by the issuer and not simply informational.

4) READ THE ENTIRE POLICY or have your attorney do so. Know the exceptions which may, effectually, rob you of insurance should the work(s) be damaged or lost.

5) Know the insurance company you are dealing with as certain ones continuously seek reasons for nonpayment or endless delay.

6) Be sure, in the case of damage or loss, you notify your own insurance company, the consignee, and the consignee’s insurance company on a timely basis.

7) Should coverage not be extended for any reason, be sure to read the fine print as to when legal action may be commenced. DON’T MISS THE DATE.

We are compiling both anecdotal and history of various insurance companies’ responsiveness and willingness to live up to their responsibilities. Please forward any information of interest you may have to us at



Improper Practices Part II


Yesterday’s note on practices in the art market brought forth a slew of comments and suggestions for publication. We have vetted and two of them and will convey them on to you here.

1) An invoice, not objected to within 30 days by the recipient is deemed to be accepted and becomes a contractual obligation to pay. Buyers, beware of contested invoices going uncontested for more than thirty days.

2) When shipping valuable items with one’s shipper, do not waive any claims of damage to the works while in the hands of the shipper unless you have obtained, in writing, permission for the waiver from your insurer. Failure to do so is cause for the insurance company to deny coverage on damage and, in fact, cancel the policy.

As the art business has grown, the laws, as mentioned here, have the attention of the authorities and enforcement is severe – a reason the community should consult with competent counsel as to its business practices.

We would appreciate your input to our series as we develop these memorandums for the community’s benefit.