* Portuguese banks expected to lift ECB borrowings as crisis
raises funding costs
* Caixa Geral and BES expected to shelve debt issues until
* Prolonged political crisis risks eroding bank capital
buffers, complicating recovery
By Carmel Crimmins and Aimee Donnellan
DUBLIN/LONDON, July 5 (Reuters/IFR) - Portuguese banks are
expected to borrow more from the European Central Bank (ECB) in
coming months as a political crisis at home freezes them out of
international markets again, rattling their chances of recovery.
The surge in borrowing costs due to a rift within the
country's ruling coalition has raised funding costs for Caixa
Geral, Millennium BCP Banco Espirito Santo (BES)
and Banco BPI on capital markets.
Just two months ago, investors were urging Portugal's banks
to tap markets after a successful issue by the state but they
stayed on the sidelines, believing that conditions would improve
That now looks like wishful thinking.
"Spreads are widening and the cost of funding is going up
which means the shoe is now on the investor foot for the first
time this year," said Robert Montague, a senior financials
analyst at ECM Asset Management.
Prime Minister Pedro Passos Coelho has said he is confident
the government will survive the resignations of his finance and
foreign ministers but the crisis has raised questions about
Lisbon's commitment to further spending cuts and its ability to
exit a 78 billion euro bailout next year.
Even before the crisis, the International Monetary Fund
(IMF) warned that Portugal's debt position, expected to peak
close to 124 percent of annual economic output in 2014, was
In May, Portuguese bank borrowing from the ECB fell by over
two percent, leaving them owing 48.74 billion euros to
Frankfurt. The amount the banks owed the ECB peaked at 60.5
billion euros in June last year.
State-owned Caixa Geral, the country's largest bank by
assets, and BES, the second-largest, will likely shelve plans to
tap debt markets in the next few months, bankers who help
arrange such deals said.
"Two Portuguese banks had been looking for an opportunity to
access the public market but with so much hysteria around the
sovereign and Europe in general it's safe to imagine they have
cancelled those plans," said a senior syndicate banker.
"Given where Portuguese banks are trading now the argument
for focusing on ECB funding is even more powerful."
A spokesman for Caixa Geral declined to comment. BES said it
had not put any debt issuance plans on hold and still had the
flexibility to tap markets if required. A spokesman for the bank
also said it did not intend to borrow more from the ECB.
Caixa Geral and BES returned to international capital
markets last year but Millennium BCP and Banco BPI have yet to
join them. Millennium BCP told Reuters it had no plans to tap
the markets this year, citing a comfortable liquidity position
and no further refinancing needs in 2013.
No one from Banco BPI was available for comment.
Outstanding senior bonds issued by BES in January have
widened by around 120 basis points to 592 basis points (bps)
since Tuesday. A similar bond issued by Caixa Geral in November
has widened 94 bps in the same period.
Shares in the three listed banks have dropped on average by
around a quarter from levels hit when the state staged its
market comeback in May.
Unlike in Spain and Ireland, Portuguese banks are not at the
heart of their country's debt woes and are not at risk from a
flood of impairments from a burst property bubble.
Following the country's bailout by the IMF and the European
Union in 2011, they have shrunk loan books to reduce reliance on
short-term funding markets and boosted defences against loan
BCP, Banco BPI and state-owned Caixa Geral also borrowed
around half of the 12 billion euros earmarked for the banks in
the bailout to boost their capital ratios.
BPI has repaid around 300 million euros of the 1.3 billion
euros in bonds it borrowed and its balance sheet is largely
funded by deposits with a loan to deposit ratio of 104 percent.
BCP, hit hard by loan impairments and exposure to Greece,
drew 3 billion euros from the bailout. It also has the support
of Angolan state oil company Sonangol, which earlier this year
raised its stake in the bank close to 20 percent.
Core capital levels at the four-largest banks meet the
demands of European regulators but risk being eroded by
worsening loan losses as the Portuguese economy struggles
through a third straight year of recession.
With record high unemployment of 18 percent, arrears are
expected to peak next year at the earliest.
If Coelho fails to hold the government together or push
further austerity measures, the banks' capital defences could
drop even further, raising the possibility they will need more
A prolonged rise in bank borrowing costs on the wholesale
debt markets, for example, could force the banks to compete more
for deposits at home, hollowing out profit margins already wafer
thin due to the weak return on their lending rates.
Banks could also cut back on lending even more to conserve
capital, deepening the sovereign debt crisis.
The banks' capital levels could also be hit if the drop in
government bond prices deepens, forcing them to take a hit on
their stock of such assets.
Portuguese banks have ramped up holdings of Portuguese
government debt but purchased much of the paper last year when
yields were well above current levels, meaning recent volatility
is unlikely to have hurt them significantly.
(Additional reporting by Steve Slater in London; Editing By