PORTUGUESE BANKERS OPTIMISTIC

C O N F I D E N T I A L LISBON 002707 NOFORN SIPDIS COMMERCE DEPT FOR ITA/MAC:DCALVERT E.O. 12958: DECL: 11/14/2018 TAGS: ECON EFIN PO SUBJECT: PORTUGUESE BANKERS OPTIMISTIC REF: A. LISBON 02666 ¶B. LISBON 02694 Classified By: AMBASSADOR THOMAS STEPHENSON FOR REASONS 1.4 (B,D) SUMMARY -------------- ¶1. (C) Portuguese financiers continue to express cautious optimism about the Portuguese financial markets and to support the leadership demonstrated by the U.S. Treasury Secretary and Portuguese Finance Minister. Ambassador Stephenson met with four leading Portuguese bankers who are concerned about Portugal's troubled export markets and agree governments should support the development of emerging economies and innovation rather than resort to protectionist measures and overregulation. They say banks will soon begin to access the GOP line of credit to increase capitalization and do not foresee additional bank nationalizations in the near future. All agree that the Portuguese financial sector would benefit from consolidation. End summary. BANKERS REMAIN CAUTIOUSLY OPTIMISTIC -------------- ¶2. (C) The Ambassador hosted a second breakfast meeting on November 13 to discuss the global financial crisis and the situation in Portugal with a different group of financiers from those at the October 23 meeting (Ref A). Attending were Carlos Rodrigues of Banco de Investimento Global (BiG), Fernando Oliveira of Banco Caixa Geral de Depositos (CGD), and Jose Cerezo and Nestor Paz-Galindo of JP Morgan Chase (Heads of Financial Institutions for Portugal and Iberia, respectively). Like the financiers in the October 23 meeting, this group expressed cautious optimism about the Portuguese financial markets and agreed with the ambassador's opinion that Portugal's conservative policies of the past were to thank for its relative stability today. ¶3. (C) Rodrigues of BiG expressed support for the U.S. Treasury Secretary's change in approach for the intervention in U.S. financial markets, from the purchase of distressed assets to equity investment in U.S. financial institutions. Rodrigues and the others questioned the wisdom of allowing Lehman Brothers to fail, but all agreed that the U.S. is fortunate to have such an experienced Treasury Secretary in this crisis and complimented his flexibility in adjusting the approach. The group also agreed with Oliveira when he expressed strong support for Portuguese Finance Minister Teixeira dos Santos. EXPORT CONCERNS AND FEARS OF PROTECTIONISM -------------- ¶4. (C) Oliveira of CGD said Portugal continues to be relatively stable, but he is concerned about the export sector. Spain, with an economy in recession and facing rapidly increasing unemployment, accounts for approximately 30 percent of Portuguese trade, and Portugal will face greater difficulty if it cannot find alternative export markets. To that end, Oliveira said CGD and other banks have been establishing new credit lines with emerging economies such as Angola, Mozambique, and South Africa. Oliveira and the others fear some countries may resort to protectionist measures to support their own industries but say governments should instead work to reinstill confidence in financial markets and seek new opportunities for business. The group agreed with the Ambassador who said he also feared overreaction in the establishment of additional regulation, which could stifle entrepreneurship and innovation vital to pulling world economies out of their current difficulties. ¶5. (C) The Ambassador asked if banks would begin to access the 20 billion euro fund established by the GOP to increase bank capitalizations, and the group unanimously agreed that they must, and publicly-held and widely-respected CGD must be the first to do so, to set a strong example for other banks. Rodrigues said he was surprised and concerned when three of the largest Portuguese financial institutions publicly stated they would try to avoid accessing the fund the day after its announcement by the Finance Minister, and that it is critical that there be no stigma attached to banks who apply for the funds. Oliveira replied that CGD is preparing to access the GOP fund very soon. ¶6. (C) Regarding CGD's assumption of management for recently-nationalized BPN (Ref B),Oliveira said CGD's goal is to ready BPN for reprivatization. If that is not feasible, other options would be to breakup the troubled bank or permanently integrate it with CGD. All agreed that BPN's troubles are due to mismanagement and "criminal" malfeasance, and they do not foresee additional nationalizations in the near future. FINANCIAL CONSOLIDATION WELCOMED -------------- ¶7. (C) The bankers also said they expected, and hoped for, consolidation of Portuguese financial institutions. Rodrigues said Portugal would benefit from consolidation, as there are "too many institutions with too little cash, who don't know what they are doing." All agreed that the lack of liquidity and rapidly declining consumer demand are the most serious problems facing world financial markets. COMMENT -------------- ¶8. (C) Despite the recent BPN nationalization and continuing concerns about liquidity, financiers here express cautious optimism about the future. The unanimity of the group regarding their need for the 20 billion euro fund is striking, and we expect to see a number of other institutions applying for the funds once CGD has done so. All agree that world markets are in for a prolonged and painful period of deleveraging, but they remain confident that Portugal will be less impacted than its European neighbors and that U.S. leadership will eventually restore global financial stability. End comment. STEPHENSON