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Portuguese report Portuguese report
by Euro Reporter
2011-08-09 08:31:14
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Banks' ECB borrowing little changed in July

Portuguese banks' cumulative borrowing from the European Central Bank was virtually unchanged last month from June, as banks' access to the wholesale interbank funding market remained blocked while the country is under an EU/IMF bailout. The Bank of Portugal said on its web site (www.bportugal.pt) on Monday borrowing in July stood at 44.2 billion Euros ($62.26 billion), a 0.8 percent rise from June levels -- after having dropped over 7 percent the previous month.

Investors' concerns about Portugal's public finances and heavy debt burden have squeezed the country's banks out of the interbank market for loans, leaving them dependent on the ECB's non-standard liquidity measures. The country's main banks passed last month's European financial stress tests, but the Bank of Portugal wants them to boost their capital and reduce dependence on ECB funding.

Portugal is implementing austerity measures under a 78-billion euro EU/IMF bailout pact, which includes 12 billion Euros for banks to recapitalise. The plan also allows the state to guarantee up to 35 billion Euros in debt issuance by banks. Analysts expect the banks to remain reliant on ECB funds until Portugal can demonstrate it is making headway in meeting its fiscal goals.


PM Says EU, US Instability Hurt Country's Path

The financial turmoil in Europe and the U.S. will hurt Portugal's already difficult path toward stability, Prime Minister Pedro Passos Coelho said in a message late Sunday on the social networking site Facebook. "We know our starting point is extremely weak and that the instability in the European and U.S. financial systems are stones in a path already filled with sacrifices, both in intensity and time," Passos Coelho said in his first comments following Standard and Poor's Corp.'s downgrade of its U.S. credit rating.

"We obviously have a lot of work ahead," he said. Portugal is in the midst of implementing a tough bailout package put together by the European Union, the International Monetary Fund and the European Central Bank to fix its accounts and propel economic growth in exchange for EUR78 billion in loans.

Since taking power in June, Passos Coelho has quickly imposed austerity measures that will likely lead Portugal toward a recession until 2013. In his Facebook posting, the prime minister said he doesn't commit to "quick results with soft sacrifices," but said at the end of the bailout implementation, Portugal "will be much better prepared to compete and win."


New Austerity Fails to Bring Down Borrowing Costs

Two months into the job, Portugal’s Prime Minister Pedro Passos Coelho is deepening the budgetary pain without feeling any gain. Swept to office June 5 on the back of a 78 billion-euro ($110 billion) rescue sought by his predecessor, Passos Coelho has announced a tax charge and spending cuts together worth more than 1 percent of gross domestic product to ensure he meets the targets set out in the aid package. All he’s got in return are higher borrowing costs as contagion spreads to Italy and Spain.

“There was and there will be a contagion effect,” Andre Pinheiro, who helps oversee 100 million Euros of assets at Orey Financial SA in Lisbon, said in a telephone interview. “Our recovery depends on their recovery, and our yields won’t decline if they don’t recover.”

The first review of Portugal’s aid program began this week as the sovereign debt crisis shifted to Italy and Spain, driving yields on 10-year bonds to euro-era records. With the third- and fourth-biggest economies in the common currency now shouldering yields closer to 7 percent than Germany’s 2.30 percent, Coelho’s bid to show he’s serious about taming Portugal’s deficit has yet to impress investors. “The government’s making an effort at budget consolidation but it’s not possible to assess the program using the yields of the secondary market,” Amilcar Morais Pires, chief financial officer of Banco Espirito Santo SA (BES), Portugal’s biggest bank by market value, told reporters in Lisbon on Aug. 1.

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