Portugal’s banks make huge profits from government debt

IN THE RADICAL PRESS / ESQUERDA.NET

By Alvaro Arranja

According to the financial press, Portuguese banks cut loans to companies by €6.8 billion euros this year. On the other hand they invested €7.4 billion in debt. Banks continue to reduce credit to Portuguese companies, despite warnings from the International Monetary Fund (IMF) and from the European Central Bank (ECB), which in December and February, opened its purse strings. The ECB’s two long term refinancing operations were supposedly to ensure that European banks would have sufficient funds to ensure that credit would continue to flow into the economy, despite the need to comply with debt maturing in 2012.

And so Portuguese banks got a real bargain, taking money meant for the economy to instead use it to profit from government debt. Which was the case of BPI [Portugal's third largest bank by capitalisation ] as revealed by its latest profits.

In the last ECB operation, the Portuguese banking sector took almost €8.8 billion, at an interest rate of 1%. In the two months that followed, Portuguese banks invested €6.3 billion in Portuguese government bonds. In total Portuguese banks increased their exposure to sovereign debt in the country to €7.4 billion in the first eight months of the year, according to data released Thursday by the Bank of Portugal.

Of this amount, €5.4 billion were channeled into Treasury Bonds, which means that these securities have been acquired in the secondary market, since Portugal has not been issuing medium and long-term debt since the Troika ‘bail out’ in April 2011. In other words, these sovereign bond purchases were an investment not to ensure state funding.

Portuguese banks raised money from the ECB at 1% and then used this immediately to buy debt, earning returns generated from interest rates that, in the case of Portuguese debt, amounted to 15%.

This madness could be ended if the ECB directly financed governments at the same rate that it provided loans to private banks. For this reason, we will never see prime minister Passos Coelho, finance minister Vítor Gaspar or any other government politician support this change of role for the ECB. It would kill the goose that lays the golden egg. How would they guarantee their future seats on bank management boards?

The ‘crisis’ (ie, austerity and other forms of theft), must continue …

esquerda.net October 26, 2012

Translation by Revolting Europe