Vampire Squids, Zombie Banks, And Caminhada Banco Mortos

Okay, I don’t know if that is a good translation of Dead Bank Walking into Portuguese, but I didn’t think zombie banks was sufficient.

As noted earlier Portuguese banks are borrowing almost €48 billion from the ECB’s short term facilities.  I have been told that this number doesn’t include any LTRO borrowings.  I assume this does include any borrowing from the Portuguese Central Bank (though that is probably optimistic).  It likely includes the borrowing in Portugal of the Portuguese subsidiaries of foreign banks.  But it did lead me to wondering just how big the Portuguese banking section is.

Banco Espirito Santo has a €2.3 billion market cap and total assets of €80 billion.
Banco Comercial Portugues has a €1.2 billion market cap and total assets of €94 billion.
Banco BPI has a €0.5 billion market cap and total assets of €43 billion.
Banif has a €0.2 billion market cap and total assets of €16 billion.

These seem to be the 4 largest banks in Portugal and any other large presence seems to be subsidiaries of Spanish banks.

So the total market cap of these 4 institutions is €4.2 billion market cap and total assets of €233 billion.

These banks are likely getting the lion’s share of the €48 billion of ECB money.  That would imply 20% of their funding is coming from ECB programs?  That doesn’t include LTRO.  It may not include programs done with the Portuguese Central Bank.  It may be overstated because small banks and subsidiaries of other banks may be a portion of the €48 billion, but it strikes me as scary, and it strikes me as being very similar to Greece.

In spite of all the talk about how “Greece is unique”, Portugal looks like a younger sibling if not identical twin.

The ECB owns Portuguese bonds bought via the SMP that are significantly underwater – same as in Greece.
The bulk of Portuguese bonds are done under Portuguese law rather than international law – same as in Greece.
Portuguese 10 year bonds are trading at 50, to yield 13% – just like Greece back at the end of August.
Portuguese banks are surviving based on borrowing from the ECB and possibly their own Central Bank – just like Greece, where the amount of “bailout” money allocated to bank recapitalization seems to rise by the day.

The tension in Portugal is growing, and the Economy Minister threatened to quit on March 1st, over a dispute that the supervision of EU funds will be handed to the Finance Ministry rather than the Economy Ministry – how far away can we be from a technocratic appointee?

We are not yet through the Greek restructuring, and may not even make it through without a lot more pain, but how far away is the Portuguese restructuring?  And Ireland cannot be far behind either.

LTRO has done something.  It definitely made the market comfortable and that comfort, if nothing else, made the market respond.  It is unclear whether much of the “Carry” trade is occurring.  With the amount of deposits at the ECB increasing dramatically again after LTRO2, it seems unlikely that as much is being used for NEW carry trades as the bulls want to believe (people seem to forget most of these banks only do the carry trade and it is the carry trade that has caused them problems since the assets have deteriorated).  What is unclear, is what the impact of LTRO is, in the event of another downturn in the markets.  Will LTRO3 really help or will the market run from overleveraged banks that are borrowing from facilities that subordinate all other stakeholders?

This lull, or eye of the hurricane, should be used to wipe out the banks that need to be wiped out, raise new equity for the banks that have a chance (at the expense of current shareholders).  Better capitalized and stronger banks is the real firewall, but the reluctance to take that pain is highly likely to hurt us in the future, and LTRO3 will already be “priced in” so its ability to stem another decline is far less likely.