Banif was the subject of a controversial resolution at the end of the year, after receiving public aid in 2013. What is your assessment of the process?
He acted is arbitrary, bureaucratic and destructively on people and businesses – Banif and some business customers, shareholders and creditors of the bank. The facts not interested. An objective assessment was not done. It is unknown whether or not there was merit in the Banif management. The State injected € 825 million in the bank and private injected EUR 450 million. Many bank customers trusted their savings of hundreds of millions of euros in subordinated debt of the bank. The bank and its employees have been through a tough restructuring process and many lost their jobs. Many bank branches were closed. And, after all this effort, the State and the Bank of Portugal so treat citizens and taxpayers? Without even knowing whether the bank was insolvent? It seems unacceptable.
What do you think of the choices made by the previous government?
Once the initial negotiation were created unnecessary constraints on the actions of the State and the bank itself, perhaps for ideological issues. In other countries, the Commission accepted bailouts and nationalization of banks. The choose public recapitalization, and there were other alternatives, the state should only be accepted recapitalize the bank with the agreement of all European authorities and should have nationalized the bank while imposing deadlines for the re-privatize. The definition of terms diminishes the value of the shareholder position of the State to create pressure for its sale. The “kick” the problem forward resulted in this government’s negotiating position fragile situation. Furthermore, there is widespread ignorance of the most senior members of the country about the true situation of Banif and treatment of the dossier, in some dimensions, casuistry.
In what way?
For example, the previous government apparently did not know how much value Banif; the Banif was insolvent or not; if, in legal terms, or could not apply the measure of resolution; whether or not to be intransigent and disagree with the Directorate General for Competition (DGComp) of the European Commission. A new public aid To be necessary, with the application of the measure of resolution, the previous government did not know what amount of state aid necessary to stabilize the bank. Therefore, was not able to do a good briefing the new government.
The new government also has no responsibilities?
It has. I had an obligation to answer these questions before you spend over 3800 million euros of public funds and guarantees, bringing the total bill to almost 4600 million. When in doubt, it is best to do nothing. If the new government had doubts, waiting and clarified the outstanding issues, and then made a decision. Should not make a decision of 4600 million under time pressure without substantive analysis of each of the possible alternatives … because there are always alternatives.
The role of the European Commission did not condition the decisions?
The DGComp have here a very strange role. He went on to say that the Portuguese authorities to sell the Banif Santander and officially defended the resolution of the bank, at least more than a month before this happens, according to the “Express”. It almost seems that DGComp is an investment bank, and not the authority of the European competition.
And how do you see the position of the Bank of Portugal (BoP) in the middle of all this?
We do not understand the role of the board, because he could only intervene in Banif applying a bank resolution measure in the short term, the Banif violated the minimum capital ratios. Well that did not happen. It can not expropriate based on assumptions that Banif, an uncertain future, would violate the prudential supervision rules in banking. It’s like holding a citizen because he believes will commit a crime in the future. This should only happen in science fiction movies with Tom Cruise ["Minority Report"].
Who can they then allocate responsibilities?
Before you allocate responsibilities, it is necessary to try to mend the hand and correct the error. It is likely that the sales contract signed with Santander is shielded. Therefore, it should be almost impossible to reverse the resolution of Banif. But most likely, it can start a process of in-depth investigation to examine whether the Santander benefited or not from Portuguese state aid. The first goal, before looking for guilty, should be designed to remedy the situation, in particular seek to recover a significant portion of the 4.6 billion euros of public aid granted to the former Banif.
These are 4.6 billion total bill Banif case to the public coffers?
At this time, based on the available information, we estimate that to be the total public aid. But the BOP’s deliberations are ambiguous and opaque. In particular, do not know which translates one of the phrases such resolution that essentially says Naviget / Octant, the resolution fund, takes responsibility for the Banif losses. How long and how high?
But then there must be accountability .
There are two separate issues. The first is whether the Banif accounts were either not staid and direitinhas. If this is not the case, the responsible entities are the management of the bank, the respective auditors, the bop and the previous government, since the state was the principal shareholder and named some of the bank executives. The second issue is about who is responsible for the resolution of the Banif, whether the accounts were staid and direitinhas or not to be. It seems to me that entities were instrumental in resolving the Banif were DGComp, the ECB, the Bank of Portugal and the previous government, which was responsible for conducting negotiations with such entities and ensure the protection of the national interest. The new government also has responsibilities because he has accepted inject another 3.8 billion euros of public money in addition to the 825 million of the capital injection carried out in 2013, and because it has an obligation to defend the interests of the State shareholder. The state owned 60% of the Banif actions.
The resolution was avoidable?
It was avoidable, was unnecessary and apparently without legal basis: the Bank met the capital ratios was not insolvent, was not in imminent danger of failing. Yes, there was a run on the bank because rumors circulated, probably on the basis of inside information that DGComp demanded since November 17, at least, the application of a measure of resolution to the bank. So the announcement that it would apply a resolution measure precipitates a run on the bank, which in turn is used to justify the implementation of the resolution measure. More circular logic is impossible.
In this phase, the Bank of Portugal could still have done something?
I should have immediately declared that he would not be applied a measure of the resolution because Banif Banif meet the minimum capital ratios. The BoP could not have stated that the deposits were always assured. Modern central banks were created precisely to deal with banks to racing – are a lender of last resort. They were created to promote financial instability or bank runs.
What other solutions for Banif could there be?
The first alternative – and better, in my opinion – was not making any kind of intervention. Banif meet the capital ratios. Resorted to emergency loans from the ECB and bop. Have sufficient assets to offer as collateral and thus obtain additional liquidity. The BOP should have made a statement declaring it would not and could not be made a measure of resolution because the bank was solvent and meet the capital ratios. And simply wait. A run on the bank settled down after the first few days.
What if continue?
Then, the state – if he knew that Banif was solvent and meet the capital ratios – could announce that he had given instructions to the Caixa Geral de Depósitos (CGD) to temporarily borrow money to Banif. This decision could, of course, result in a process of investigation of the European competition authority, but the state can not stand helplessly and let planted rumors destroy Portuguese banks. And there are other alternatives. For example, buying the bank CGD, direct injection of public funds or indirectly, for example through the resolution fund, state loans, State guarantees, etc. And if it were proved that the Banif did not meet the capital ratios, a bank resolution measured with bail-in of large creditors and large depositors, they should receive in exchange shares of the bank.
The Ministry of Finance claims that a possible solution with losses for bondholders would affect migrant applications.
I do not agree, because it assumes that it was necessary servicing the bank without even prove it. The latest accounts of Banif indicate that the Bank met the capital ratios and therefore the BOP could not have applied a measure of resolution. But even if it was necessary to apply a measure of resolution, it was preferable to the participation of major bondholders and large depositors than the option chosen to make taxpayers pay the bill. It was possible to capitalize the bank, more than it already was, imposing losses small to large bond and migrants. And in that case, they should receive the Banif shares in exchange.
In the solution to recapitalize the New Bank there have been losses for senior bondholders. Agreed with this solution?
No. It was an arbitrary decision, unwarranted and unnecessary. Did not reflect on the consequences. There were other alternatives that would address the alleged lack of capital New bank. We used an apparently simple expedient, but will – is already having – consequences. They were treated senior bondholders in practice as if they were shareholders. There were some bank creditors and customers who bought those bonds already after the New Bank be created and that, from one day to another, find themselves expropriated 100% of their claims. No ifs or buts … It appears that the BOP continues to improvise and already promises to ensure the return of 20%. How will? Of course, with public funds. The litigation is certain and it is likely that the State loses the legal actions. Ie who will pay the bill will again be the taxpayer. And it must also consider the country’s credibility costs in financial markets.
The government claims that was against this solution designed for the BoP. Could have done something?
If you were even against could ultimately change the law and prevent the bop of the board to do what he did. The state is sovereign. It means it has the power to propose laws to parliament to approve decree-laws, ask the Assembly of the Republic legislative authorization or even apparently change decree-laws in the Council of Ministers. This is what happened, for example, with the resolution of BES, where the previous government Cabinet met virtually via email to amend an article of the decree-law that frames the bank resolution. If the government had changed the law, the bop of the board, thank you that is fulfilling the laws of the Republic, he could not have done what he did. And so, the government would not interfere with the “independence” of the supervisor. The government was against bop a soft way.
The risk of litigation with the transfer of the obligations of Novo Banco to BES is not excessive?
The decision has unpredictable consequences because translates an operation never before performed internationally as far as I know. There are precedents. Now the courts in the Anglo world – Saxon work, largely based on established case law. As this case, apparently, there will be established now for the first time. Part of debt securities the New Bank will be in other jurisdictions: London, Luxembourg, Cayman Islands. In addition, there are derivative contracts on the debt of the New Bank – credit default swaps, a kind of debt insurance – that transact in international markets. On the other hand, the debt securities of Novo Banco contains cross-default clauses, which state that all debt goes into default if a portion of the debt to default. You may baste one of the judges of these courts consider that retrativa transfer of the senior debt of Novo Banco to BES is an event of default for the remaining creditors of the bank consider that the remaining debt is in default. And there are other possible scenarios. The Single Board Resolution – the ECB – can intervene against a default statement. It does not seem possible to foresee all possible contingencies at this time.
It is likely that the State loses actions in court?
The state may lose the legal actions raised by senior creditors of the New Bank, for example, because the decision of bop probably violates the right to private property enshrined in the Constitution. In addition to not being able to comply with the national bank resolution law, which stipulates that creditors and shareholders are entitled to receive what they would receive if the bank had been settled. Ie the senior creditors can legitimately argue that, if the bank had been liquidated, would likely receive more than 0%. In short, the state runs the risk of losing more than two billion euros confiscated from senior lenders. In particular, it risks losing its shareholder position in the New Bank. It seems that we chose the worst alternative. There were other, the first of which would do nothing in the short term.
When you call them bond to the solution, there are echoes of the risk aversion of the country and Portuguese banks increased. It is indeed a problem?
Yes. The bail-in of the New Bank obligations had enormous consequences, well beyond the expected. It was like a butterfly wings beating with huge and unexpected repercussions. Besides the impact on the risk of the country and of the Portuguese banks, has had a significant impact on Italian banks, which already resented the resolution process four small banks in that country. The point of the Italian Prime Minister to engage again in creating a bad bank to clean 200 billion euros of toxic waste from the Italian banks and a proposal to provide guarantees to the Italian public banking. And it had an impact on financial markets, with the publication of opinion articles on the bail-in senior lenders in the “Financial Times” and other items on Bloomberg and Reuters. It caused controversy. Forced the ECB to issue a statement.
Portugal has had, since 2008, successive interventions in the financial system. What motivated so many difficulties?
The huge increase in debt of companies, families and state that occurred since the end of the 1990s until the end of the last decade, was only possible because it was intermediated by banks, with the Eurosystem funding support. As a result, the Portuguese banking has become much indebted to the outside. Until 1997, the Bank of Portugal forced banks to maintain minimum reserves of 17%. Therefore, for each new euro money deposited, the bank could create a theoretical maximum of 4.9 credit euros. Bank credit was scarce. The ECB, when it was created, reduced reserve requirements for only 2% and changed the monetary policy instruments and procedures. As a result, per euro, the bank started to be able to create a theoretical maximum of 49 credit euros. Credit exploded and interest rates fell. Moreover, the new monetary policy instruments and procedures defined by the ECB allowed the Portuguese banking debt to the outside almost limitless. As a result, in late 2009, the bank was responsible, directly or indirectly, for more than half of the gross external debt of the country and more than twice the gross external debt of the state.
The memorandum signed with the troika should have safeguarded these issues?
Part of the memorandum relating to banking was very weak and poorly prepared. They were provided support to EUR 47 billion, including 12 billion to recapitalize the banking sector and the rest in government guarantees. The monies were public, but the management would continue with the former shareholders. The aim was to avoid the word nationalization – that occurred in other European countries such as England. The bank was obliged to return the aid. In the case of Banif, for example, the recapitalization plan would last until 2017. But what was the memorandum was an impossible task set by the troika: in the middle of an adjustment program and unprecedented austerity, national banks, much indebted to abroad, dependent on the national economy, had to clean up and to find, within a few years, private investors for the fund at 47 billion euros! Of course the strategy, unrealistic, had everything to go wrong.
then you agree with the first – minister, who believes that the problems of the banks were overlooked during the troika
Yes. The troika worried and concerned – with details, ignoring the elephant in the room. The bailout of the banks represented such 47 billion and rescue the country was 78 billion euros. Therefore, it should have been obvious that the most important component of the rescue the country was precisely the rescue of banking. That is, a large part of the memo should have been on the bank, rather than represent a small part of the document. Another important component of the ransom should have been debt restructuring, which was also ignored – for now the IMF do the mea culpa. The economic value of a decision itself contains important information and interpretation relatively easy. If the rescue of banks is amounting to EUR 47 billion, this signals that the country and the troika should have dedicated many resources to follow this dossier. Instead, the troika and the previous government spent most of the time discussing controversial issues, with much relevance and social impact, but with economic impact to the country of much smaller: the minimum wage, support the unemployed, cuts in health, increased user fees in hospitals, the introduction of fees in Scuts or the number of parish councils, etc. Worried and spent his time with measures affecting perhaps tens of millions of euros and thus did not have time to closely monitor dossiers of EUR 47 billion. Resolutions of BES and Banif are a result of this work methodology.
How much confidence do you have today in the solvency of the financial system?
The main problems of national banks at present are not their capital ratios, but its liquidity position, the result of its high foreign debt, and the weakness of domestic economic activity. The bank is still very indebted to the outside, despite the huge level of public aid it has received in recent years the Portuguese state, which in practice takes part of the external debt of banks in this period. This external debt translates into a huge reliance on Eurosystem funding and international financial markets through debt securities. For this reason, the Portuguese banks could face anytime a systemic crisis if you see access to finance from the Eurosystem restricted or is unable to refinance its debt securities in international markets. In particular, the rating agency DBRS down the rating of the Republic in only one level, the Portuguese public debt would no longer be accepted as collateral for liquidity-providing operations, it is likely that the same occurred in relation to many other assets that national banks used as collateral. The national banks would have great difficulty in financing themselves with the Eurosystem and is almost certainly would have to resort to emergency liquidity assistance from the Bank of Portugal.
CGD will likely strengthen capital target with OE2016. How does the state of the public bank?
With some concern. Successive governments have injected huge amounts of capital in Box without apparently explanations or consequences. And some strategic decisions Box raise questions. Caixa has a very important role in the national financial system should be preserved and defended. But the EU government institutions understand the importance of the case for national policy makers and use the threat of a potential intervention in the case as a negotiating tool to enable them to do as they please with the rest of the banking system. Portugal should look at how other countries are acting in relation to the Banking Union, in particular, Italy and Germany. There was a bank in Germany that put a process in court because he would not turn out to be supervised by the ECB
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