Portuguese Banks Climb After Government Requests European Union Bailout

Portugal’s banks climbed in Lisbon trading as the country became the third euro-region nation to seek a rescue from the European Union after the lenders earlier this week urged the government to ask for aid.
Banco Espirito Santo SA (BES), Portugal’s biggest publicly traded bank by market value, advanced 4.2 percent and was the third- biggest gainer among members of the Stoxx Europe 600 Index and the leading gainer in the Bloomberg Europe Banks and Financial Services Index. Banco Comercial Portugues SA (BCP), the second-biggest publicly traded lender, climbed 4.1 percent.
“For the Portuguese banks to be able to fund themselves effectively, they need capital and for people to be confident in their capital base,” said Simon Maughan, an analyst at MF Global in London. “If the market decides that’s what they need, that’s what the Portuguese banks will have to deliver. A bailout will change the time-frame, but not the direction of the total narrative.”
Prime Minister Jose Socrates last night announced that Portugal will seek a bailout from the EU after the nation’s political crisis pushed borrowing costs to record levels. Portuguese banks had urged the government to ask for aid as downgrades by credit-ratings companies threatened their ability to borrow in wholesale markets.
Stabilization?
Yields on Portugal’s two-, five- and 10-year bonds have all reached record levels since Socrates offered to resign on March 23 after parliament rejected proposed budget cuts, leaving him in charge of a caretaker government with limited powers until a June 5 election.
Following the aid request, “there may be a stabilization of yields at levels that are more in line with the reality of the country’s risk and of the risk of the banks,” Banco Espirito Santo Chief Executive Officer Ricardo Salgado was cited as saying in Portuguese newspaper Diario Economico today.
Espirito Santo’s Salgado this week followed Banco Comercial Portugues CEO Carlos Santos Ferreira in saying the government should request a loan from the European Commission. The government should request a short-term loan “urgently” before the June elections, Salgado said. Longer-term financing from the European Financial Stability Facility seems unavoidable after a new government takes office, he and Santos Ferreira said.
Moody’s Investors Service yesterday downgraded its ratings on seven Portuguese banks, including Espirito Santo and Banco Comercial, joining Standard & Poor’s and Fitch Ratings, which also lowered banks’ ratings after downgrading the country’s debt.

ECB Financing

EU financial support to Portugal “could be good” for the country’s banks in terms of liquidity, Olga Cerqueira, an analyst at Moody’s Investors Service, said by phone yesterday. “We don’t expect markets will open immediately for Portuguese banks if Portugal gets support from Europe.”
Portuguese banks have been relying on financing from the European Central Bank as the government’s difficulties in coping with its debt and deficit squeezed their access to the interbank financing market. The country’s banks borrowed 41 billion euros ($59 billion) from the ECB in February, 0.2 percent more than in January, marking a third consecutive increase.
Portugal is aiming for a package that may be worth as much as 75 billion euros, two European officials with knowledge of the situation said. The country faces bond redemptions in April and June that total 9 billion euros.

Socrates, Coehlo

The Portuguese two-year government bond yield last week rose above the rate on the nation’s 10-year debt for the first time since 2006.
Officials may start hammering out the details of a rescue package at a meeting of EU finance ministers that starts tomorrow in Godollo, near Budapest. European Central Bank President Jean-Claude Trichet, whose Governing Council may vote today for the euro region’s first interest-rate increase since 2008, will also attend.
Socrates, who leads the Socialist Party, didn’t give details on the kind of package that Portugal needs. Social Democratic Party Leader Pedro Passos Coelho said he will support the aid request. The International Monetary Fund said it stands ready to assist Portugal if needed. The European Commission said the Portuguese aid request will be dealt with “in the swiftest possible manner.”

Shift of Focus

“On banks, we believe that this should shift the focus from liquidity to earnings and capital, as the bailout package will likely include liquidity support to banks,” Banco BPI SA (BPI) analysts said today in a research note. The analysts said stocks related to public works, consumer spending and companies with a predominantly domestic business may be “under pressure.”
“We believe the bailout will imply additional austerity measures, which will contribute negatively to disposable income and consequently to private consumption,” the Banco BPI analysts said.
The aid request came after Moody’s cut Portugal’s credit rating on April 5 one step to Baa1. That followed Standard & Poor’s trimming the country’s creditworthiness on March 29 for the second time in less than a week to BBB-, one level above junk status.