...and so the bed news continues with Moody's reporting today that increased liabilities have heightened the risks for Portugal's weak banks and its government, with the State likely to need to raise more money, further increasing the debt burden from already high levels.
The ratings agency also notes the current uncertainty over Caixa Geral de Depósitos which needs an unquantified capital injection and suggests that the banking sector represents "a continuing risk to the government's own creditworthiness."
A report on the International Monetary Fund’s performance in Portugal today adds to the gloom, noting serial banking failures which it attributes in large part to the Bank of Portugal’s failure to control and contain the nation’s banks.
The comments about the IMF's preformance point the finger of blame at Carlos Costa, the Bank of Portugal’s governor, (pictured) who time and time again has failed to act to avoid serious banking crises.
Carlos Costa, of course, denies any such failure and hits back at the IMF report which, he says, contains ‘serious errors.’
The IMF's Independent Evaluation Office looked at the IMF's performance in its Portugal aid programme and concluded that the IMF directorate's main flaw was that it did not insist on an external independent evaluation of Portugal’s banks made by a body other than the Bank of Portugal.
The independent panel, which conducted several interviews with IMF staff and those in the Portuguese banking system, admits the impact of the resolutions for BES and Banif could have been mitigated or even avoided, if the IMF had insisted on tougher assessments from the Bank of Portugal or external evaluators, which, the authors admit would have given exactly the opposite opinion than the one supplied by the Bank of Portugal.
"Lack of rigour and serious errors," according to Carlos Costa summing up the new report which attacks the effectiveness the measures adopted by the Bank of Portugal to monitor and strengthen Portugal’s banks.
The governor is irritated that his opinion was not considered in the conclusions of a report, which he claims, "contains serious factual errors" and used newspaper reports for background material.
Costa denies he said that Banco Espírito Santo was sound when staff had been warning of problems as far back as 2011. The governor calls such allegations a "serious accusation made without foundation.”
The evaluation points out that when the Portuguese Troika programme was negotiated in 2011, there already were signs of fragility in terms of banking and banking supervision as Banco Português de Negócios (BPN) and Banco Privado Português (BPP) had collapsed on Costa’s watch in late 2008.
The main problem in all of this was relying on the Bank of Portugal to provide the quality of independent advice required of a regulator and not having an independent report commissioned on the state of Portugal’s banks and their assets.
The authors state that any mention of using an external evaluator drew the "resolute and effective" opposition from the Bank of Portugal with the result that the programme remained under the "firm control" of the Portuguese authorities.
Where some external audit evaluation was attempted, the auditors were only allowed access to selected parts of the banks’ balance sheets and of their asset portfolios due to constraints imposed by the Bank of Portugal.
The result was that the quality of inspections fell far short of an independent and comprehensive assessment and independent inspection was abandoned in the foolish belief that the "Bank of Portugal was a trusted supervisor and antagonising it in this matter would have removed the programme from the control of national authorities."
The lack of any attempt at an assertive approach by the IMF may have resulted from a combination of ideological, practical and political factors. The IMF team seems to have decided that the Portuguese crisis was all about the budget and nothing to do with the fragility of its banking sector. This portrayed the banks, as "victims and not the problem."
Experts analysing the collapse of Banco Espírito Santo revealed that officials from the European Commission from and the Portuguese government admitted to concerns about the financial health of BES in 2011 but had received repeated assurances from the Bank of Portugal so did not pursue the matter.
If the IMF had tackled the BES problem in late 2013, or early 2014, the "cost of a resolution would likely have been lower, or at least some of the controversy could have been avoided."
In summary, "If the IMF team had insisted on an external revaluation of the balance sheets of Portuguese banks, and had placed more emphasis on banking problems in implementing the programme, the collapse of BES and Banif could have been mitigated or perhaps even avoided. This would have prevented the Portuguese economy suffering the impact of a prolonged weakness in its banking sector."
As for the IMF's boss, Christine Lagarde, already facing criminal prosecution in France relating to activities when she was a minister, the report into the IMF's weak and almost complicit working relationship with the Bank of Portugal does nothing for her reputation.
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For 'The IMF and the Crisis in Greece, Ireland and Portugal - an evaluation by the independent evaluation office' report, or just the executive summary, see:
http://www.ieo-imf.org/ieo/pages/CompletedEvaluation267.aspx
