LISBON, April 23 Portugal's government hopes to reach a negotiated solution with foreign and local banks by the end of this week to minimise potential losses of up to 3 billion euros from high-risk hedge contracts agreed by public companies some years back.
Rising debts at public companies, especially in the transport sector, have hindered Portugal's fiscal adjustment programme under its EU/IMF bailout secured in mid-2011.
Public companies such as state railway company Refer took out swap contracts from international banks, including Credit Suisse and Deutsche Bank and local lenders, to protect against a rise in Euribor interest rates.
But the move backfired as Euribor rates slumped over the past few years, exacerbating the debts of the companies and adding to the state's debt since the companies are mostly owned by the government or regional authorities.
The finance ministry, in a statement, said that the IGCP debt agency had concluded that "various of those contracts have problematic characteristics, since they are not mere hedging instruments, but incorporate highly speculative structures."
The potential liability for the use of derivative instruments, contracted under the previous government, could reach up to 3 billion euros, the ministry said.
As a result, the government opened talks two months ago with the banks involved, "giving an absolute priority to repairing the financial losses suffered by the state".
The deadline for the negotiation process is the end of this week, the ministry said, adding that it would announce the results of the negotiations as well as "mechanisms needed to identify those responsible."
It did not provide further details.
International banks involved include BBVA, Credit Suisse, Deutsche Bank, JPMorgan and Merrill Lynch , among others. Portugal's Banco Espirito Santo and Millennium bcp are also involved in the renegotiation.
The companies most exposed to these contracts are the Porto Metro, the Lisbon Metro, Refer and the Transtejo ferry company in Lisbon.
Local media said the Prosecutor General's office was looking into the possibility of opening a criminal investigation into the swaps.
Diario Economico business newspaper quoted a government source as saying some of the swap contracts had already been renegotiated, while on others the government was ready to defend its interests in court, if necessary.
The source also said the talks had eliminated the main danger of a bank demanding a unilateral early termination of the contract which could lead to major losses for the government.