Identifier
Created
Classification
Origin
08LISBON2666
2008-10-27 12:08:00
CONFIDENTIAL//NOFORN
Embassy Lisbon
Cable title:  

PORTUGAL FINANCIERS FORESEE LEAN TIMES AHEAD

Tags:  ECON EFIN PO 
pdf how-to read a cable
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RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHLI #2666/01 3011208
ZNY CCCCC ZZH
R 271208Z OCT 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 7105
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 LISBON 002666 

NOFORN
SIPDIS

COMMERCE DEPT FOR ITA/MAC:DCALVERT

E.O. 12958: DECL: 10/22/2018
TAGS: ECON EFIN PO
SUBJECT: PORTUGAL FINANCIERS FORESEE LEAN TIMES AHEAD

Classified By: AMBASSADOR THOMAS STEPHENSON FOR REASONS 1.4 (B,D)

SUMMARY
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C O N F I D E N T I A L SECTION 01 OF 02 LISBON 002666

NOFORN
SIPDIS

COMMERCE DEPT FOR ITA/MAC:DCALVERT

E.O. 12958: DECL: 10/22/2018
TAGS: ECON EFIN PO
SUBJECT: PORTUGAL FINANCIERS FORESEE LEAN TIMES AHEAD

Classified By: AMBASSADOR THOMAS STEPHENSON FOR REASONS 1.4 (B,D)

SUMMARY
--------------

1. Six leading Portuguese financiers told the Ambassador the
Portuguese financial market is "getting by" with decreasing
profits during the current "deleveraging" period. Although
there is some concern about bank liquidity, the GOP is
expected to announce a bank recapitalization program next
week and the group views the home mortgage market as
reasonably sound. The executives generally support recent
U.S. and European market interventions, and the financial
industry in Portugal is taking a more conservative stance and
refocusing on its core businesses. The meeting's strongest
points regarded the need for the U.S. to undertake
"significant homework" to repair its tarnished reputation as
the leader in global finance, as China and other countries
with higher liquidity gain prominence. End summary.

PORTUGUESE MARKETS ARE BASICALLY SOUND
--------------

2. In an October 23 breakfast meeting at the Ambassador's
residence, executives from six leading financial institutions
in Portugal shared their views on the current global
financial crisis, its effect on their operations, and the
outlook for Portugal going forward. Attending the meeting
were Fernando Ulrich of Banco BPI, Pedro Penalva of AIG
Europe, Paulo Gray Pereira of Citibank International, Nuno
Amado of Santander Totta, Miguel Melo Azevedo of Merrill
Lynch, and Joao Oliveira-Rendeiro of Banco Privado Portugues
(BPP). The group consensus was captured by Fernando Ulrich,
CEO of Banco BPI, who described Portuguese financial markets
as fundamentally sound and "getting by", but with lower
profits due to increasing costs of capital. Amado described
this period as a "deleveraging cycle" which will be painful
to go through but less so in Portugal than elsewhere. All
agreed with the Ambassador who surmised that Portugal's
conservative policies, which in the past have resulted in
slower overall economic growth, were now paying dividends due
to limited exposure in devalued investments.


3. In a minority view, Oliveira-Rendeiro of BPP expressed
concern over the solvency of Portuguese institutions because

"savings in Portugal are not high enough" in this "leveraged
economy" and worried that the 20 billion euro credit line
available to ailing institutions announced by the GOP on
October 19 might not be enough. (Note: this credit line is
available to banks on a voluntary basis and is essentially a
guarantee on senior, higher-priority debt. End note.)
Oliveira-Rendeiro also suggested the minimum Tier 1 capital
ratio (the ratio of institution equity to risk-adjusted
assets) could be increased to 9 percent, but Paulo Gray
Pereira of Citibank disagreed, saying the required level of
capital must be "...in accord with the state of the economy",
and it would be impossible for banking in Portugal to be
profitable with such a high equity requirement. However,
Gray claimed the GOP is working on a bank recapitalization
program in which the GOP would buy preferred shares of
Portuguese banks, which he expects will be announced sometime
next week.


4. The group also generally agreed that the home mortgage
market in Portugal is sound, although Ulrich claimed
state-run Caixa Geral de Depositos had issued "lots of
sub-prime mortgages." Portuguese borrowers also risk
increasing mortgage payments due to the credit crunch,
because mortgages here typically have variable interest
rates. However, Gray downplayed the risk for mass defaults
in the Portuguese mortgage markets because borrowers here do
not have the ability to "walk away" from their mortgages as
borrowers can in the U.S. and elsewhere.

MARKET INTERVENTIONS WELCOMED, AND GETTING BACK TO BASICS
-------------- --------------

5. The group supported recent market interventions by the
U.S. and European countries, but some questioned the U.S.
decision to allow Lehman Brothers to fail. Nuno Amado,
Chairman of the Board of Santander Totta, opined that costs
of shoring up the financial markets might have been less had
the U.S. intervened to support Lehman. While there was some
head nodding to this point, all agreed when the Ambassador
replied there will undoubtedly be future post mortems of the
actions taken to deal with the crisis, but at the time it was
deemed important for the financial markets to understand that
the U.S. government was not a backstop for poor corporate
decision-making.


6. Due to leaner profits, the industry is refocusing on

LISBON 00002666 002 OF 002


business basics. Citibank's Gray said Citi's consumer
business has traditionally focused on pushing credit cards,
accepting a default rate of 2-3 percent of outstanding
credit. However, since May-June of this year, default rates
have increased significantly, and Gray said the latest
projections estimate default rates for 2008 and 2009 at a
multiple of previous levels. Gray commented that credit card
defaults are an early indicator of worsening trends because
they are the last bills those in financial trouble will pay.
In response to this trend, Citi has shifted focus toward
management and retention of existing accounts and instituted
a monthly cap on opening new accounts. Gray said while Citi
seeks to minimize defaults by establishing payment plans with
delinquent borrowers, the company has increased staffing in
its collections operation from 50 to 120 in just a few
months. Citi's corporate banking operations are also
increasingly conservative, and are no longer generally
encouraging borrowers to draw upon available credit.
Likewise, Pedro Penalva of AIG Europe said AIG is refocusing
on insurance operations and divesting itself of financial
ventures that he claimed were the primary cause of AIG's
recent difficulties.

U.S. NEEDS TO REPAIR CREDIBILITY
--------------

7. Ulrich of Banco BPI sounded the most critical note of the
meeting, saying the U.S. "needs to do a lot of homework" to
repair its credibility due to the crisis. Ulrich's ire was
particularly targeted at U.S. rating agencies, saying it was
"fraudulent" for raters to give the same (equally high)
ratings to Lehman Brothers and AIG immediately before their
respective crises as they gave to Banco BPI. Ulrich decried
the lack of regulation for credit default swaps and other
complex investment instruments as "scandalous" and described
some U.S. accounting rules as "rubbish," insisting he would
not do as much business in the future with U.S. institutions
as he had in the past.


8. His frustrations vented, Ulrich concluded with a request
for increased public relations from the Embassy to counter
animosity toward the U.S. as the instigator of the crisis.
"Please do the homework, because the world needs it", Ulrich
concluded. Oliveira-Rendeiro of BPP ended the meeting on a
provocative note, saying the crisis marked a change in "the
balance of power" in world finance, with China and emerging
nations which retain liquidity coming to the fore, "and maybe
that is good".

COMMENT - "GUARDED OPTIMISM"
--------------

9. Although we anticipated some reluctance to discuss the
ongoing crisis candidly, our guests were relatively open
regarding impacts on their businesses and future prospects in
Portugal. In contrast to more gloomy prospects foreseen by
larger European countries more highly leveraged in devalued
assets, Portuguese financiers are guardedly optimistic about
the Portuguese economy and judge U.S. and European actions as
probably sufficient to put financial markets on the road to
recovery. However, all of our guests tempered their optimism,
saying "in two or three months things could look different".
Post plans on scheduling similar events with other Portuguese
finance executives in the near future as the global crisis
unfolds. End comment.
STEPHENSON