The Portuguese Adjustment
Program
Meeting with European Parliament
Delegation
6 January 2014
Background Information
Carlos Silva Costa
The Portuguese Adjustment Program
1.The Program had to be designed in record time
Outline
2. Deterioration of the macroeconomic outlook
3. The financial stability pillar
4. Structural reforms
2
1. The Program had to be designed in record time
Main dates
Late March/ early April 2011:
• Deterioration in financial market sentiment made increasingly challenging for
Portugal to meet its financing needs
• The banking sector was almost shut out of international market funding
7 April 2011:
• Portuguese authorities officially requested financial assistance
20 May 2011:
• The Program was agreed by the IMF Board
30 May 2011:
• The Program was agreed by the European Council
3
1. The Program had to be designed in record time
On approval of the program there was a disbursement of €6.1 bn to
cover immediate financing needs
Government Debt
Repayment Schedule in April 2011 (*)
10-year Government bond yields
Spread against Germany in basis points
1200
1000
800
Austria
Italy
Belgium
Spain
France
Ireland
Netherlands
Portugal
Finland
Greece
600
400
200
0
(*) Excluding Saving certificates, Treasury Certificates, CEDIC and CEDIM.
Sources: IGCP, Reuters
4
1. The Program had to be designed in record time
•
•
•
The Program covers the financing needs of the General Government from
2011 to June 2014.
The financial package amounted to EUR 78 billion in loans, including EUR 12
billion for a Bank Solvency Support Facility.
Disbursement schedule significantly front-loaded.
1/3 financed by the IMF and 2/3 financed by
the EU
40
81%
Disbursement schedule
(indicative)
35
25
EUR bn
IMF
(€26 Bn)
30
EFSF
(€26 Bn)
20
15
EFSM
(€26 Bn)
10
5
0
Jun-Dec 2011
Source: EC, The Economic Adjustment Program for Portugal - Occasional Papers 79.
2012
2013
Jan-Jun 2014
5
1. The Program had to be designed in record time
The program did not cover the financing needs of State-Owned
Enterprises (SOE)
SOEs debt
End-period positions
• By March-2011overall SOE debt
amounted to about 27% of GDP.
60000
50000
• With the crisis, many SOE found
themselves in severe financial
stress.
€ Million
40000
30000
20000
10000
0
Mar-11
Dec-11
Dec-12
Oct-13
• In cases of most troubled firms,
where domestic banks have been
unwilling to roll over the debt,
Treasury financing has been
provided.
Public corporations included in general government
Public corporations not included in general government
Source: Banco de Portugal
6
1. The Program had to be designed in record time
The financing gap related with the refinancing of SOEs was closed through
Eurosystem financing via the domestic banking system.
General Government debt (*)
financed through the resident financial sector
End-period positions
Debt of SOEs not included in the General
Government financed through
the resident financial sector
End-period positions
50500
8400
8300
50000
8200
8100
€ Million
€ Million
49500
49000
48500
8000
7900
7800
48000
7700
47500
7600
47000
7500
Mar-11
Dec-11
Mar-11
Dec-11
(*) Includes debt of SOEs included in the General Government
Source: Banco de Portugal
7
1. The Program had to be designed in record time
Foreign private financing was gradually substituted by foreign official
finance and by Eurosystem financing
Private capital flows, programme financing and
Eurosystem financing
Percentage of 2007 GDP
90
Private inf lows*
80
70
TARGET liabilities
60
Programme f inancing
50
Cumulative Financial Balance
40
30
20
10
0
Nov-12
Jun-12
Jan-12
Ago-11
Mar-11
Out-10
Mai-10
Dez-09
Jul-09
Fev-09
Set-08
Abr-08
Nov-07
Jun-07
Jan-07
Ago-06
Mar-06
Out-05
Mai-05
Dez-04
Jul-04
Fev-04
Set-03
Abr-03
Nov-02
Jun-02
Jan-02
-10
* Include other components not considered in the breakdown (mainly information pertaining to
securities and other loans not obtained under the programme).
Source: Banco de Portugal
8
2. Deterioration of the macroeconomic outlook
Sucessive downward revisions of GDP Projections in Portugal and in the Euro Area
Euro Area: real GDP
Eurosystem Projections
Portugal: real GDP
Troika Projections
Projections for 2012
Portugal: real GDP
Banco de Portugal Projections
Projections for 2012
Projections for 2012
0,0
2,0
-0,5
1,0
-1,0
0,0
-2,0
-1,0
-2,5
Dec2013
Jun2013
Mar2013
Jun2013
Dec2013
Dec2013
Jan2013
Nov2012
Jul2012
Mar2012
Jul2011
Oct2013
Jun2013
Jan2013
Oct2012
Jun2012
Apr2012
Dec2011
Sep2011
May2011
Dec2013
Sep2013
Jun2013
Mar2013
Dec2012
Sep2012
Jun2012
-4,0
Mar2012
-4,0
Dec2011
-3,0
-2,0
Sep2011
-2,0
-3,0
Jun2011
-2,0
-1,0
Mar2011
-1,0
-1,0
Mar2011
Jan2013
0,0
0,0
Sources: ECB, IMF, Banco de Portugal
Nov2012
1,0
1,0
0,0
Jul2012
2,0
2,0
1,0
Mar2012
Projections for 2014
3,0
2,0
Jun2013
Projections for 2014
Projections for 2014
3,0
Mar2013
Mar2011
Oct2013
Jun2013
Jan2013
Oct2012
Jun2012
Apr2012
Dec2011
Sep2011
May2011
Dec2013
Sep2013
Jun2013
Mar2013
Dec2012
Sep2012
Jun2012
Mar2012
-4,0
Dec2011
-4,0
Jun2011
-3,0
-2,0
Sep2011
-2,0
-3,0
Mar2011
-2,0
-1,0
Mar2013
-1,0
Jan2012
0,0
0,0
-1,0
Jan2013
1,0
0,0
Nov2012
1,0
Jul2012
2,0
Mar2012
2,0
Jan2012
2,0
1,0
Jan2012
Oct2013
Jun2013
Oct2012
Jun2012
Apr2012
Jan2013
Projections for 2013
Projections for 2013
3,0
Jul2011
Projections for 2013
Dec2011
-4,0
Sep2011
-3,0
-4,0
May2011
Sep2013
-3,5
Dec2013
Jun2013
Mar2013
Dec2012
Sep2012
Jun2012
Dec2011
Mar2012
Sep2011
Jun2011
Mar2011
-2,0
Out2011
-2,0
-3,0
-1,0
Out2011
0,0
-1,5
Out2011
1,0
Jul2011
2,0
Mar2011
3,0
9
2. Deterioration of the macroeconomic outlook
Impact of fiscal policy have been larger than expected
Both in theory and practice there is no “single” fiscal multiplier
The range of estimates for fiscal multipliers is large and depends on:
The size and openness of the economy
Monetary and exchange rate policy
The state of the economy: output gap large or small; banking system situation
The permanent versus temporary nature of the fiscal measures
The kind of fiscal measures: taxes versus expenditures
Degree of nominal and real rigidities
Public perception regarding future income flows
10
3. The financial stability pillar
Banco de Portugal main focus was on the financial system pillar
Stabilization of the financial sector:
Addressing banking sector vulnerabilities to restore market confidence,
while at the same time ensuring a smooth and gradual deleveraging
process that does note undermine growth
A comprehensive strategy
was followed
Reinforcing
bank solvency
Protecting
banking
system
liquidity
Enhancing
the
effectiveness
of supervision
Improving
the regulatory
framework
11
3. The financial stability pillar
 To ensure transparency and enhance confidence in the domestic banking
system and in the quality of the balance sheets, Banco de Portugal
favored an approach different from the one followed by Greece and
Ireland. This was closely discussed with the Troika.
 The approach consisted in combining a point-in-time perspective to
confirm the accuracy of the solvency ratios with a stressed forward looking
perspective to assess the resilience of banks.
 This approach is very similar to the one followed by the ECB in the
comprehensive balance sheet assessment in the context of the
preparatory works for the Single Supervisory Mechanism.
12
3. The financial stability pillar
Special on-site Inspections Programs
Portuguese experience
Main drivers
Value of
Assets
Workstreams
Objectives
Valuation of credit
portfolio
Validation of the impairment
• Assessment of management policies
and processes
• Individual and collective assessment
of impairments
WS1
Solvency
Assessment
Capital
Ratio
RiskWeighted
Assets
Stress
Testing
Credit risk capital
requirements
calculation
Validation of the capital requirements
amount for credit risk computed by the
banking groups, taking into account
the different calculating approaches
WS2
Assessment of
stress test models
Assessment of parameters and
methodology used by the banks in the
stress-test exercise
WS3
13
3. The financial stability pillar
Special on-site Inspections Programs
Portuguese experience
Perspective
Initiative
Point-in-time analysis
Accounting perspective
Prudential perspective
WS1
Valuation of
Credit Portfolio
WS2
Credit risk capital
requirements
calculation
• Impairment review
• Assessment of
management
policies,
procedures and
controls
• Validation of
capital
requirements
calculation for
credit risk
component under
SA and IRB
Forward-looking analysis
Funding Plans
• Funding and
capital needs
according to
projections going
forward under a
baseline scenario
WS3
Assessment of
stress test models
• Funding and
capital needs
according to
projections going
forward under a
baseline and
adverse scenario
14
3. The financial stability pillar
A well defined governance structure has been key to the successful execution
of the Programme
Structure
Steering Committee (SIP)
•
•
•
•
Banco de Portugal (BdP)
FMI, EC e ECB
ACP (BdF), BdE, BNB (Central Banks)
National experts
PMO
• Banco de Portugal
• External advisor (SIP)
Project Managers
• BdP
• External parties
Inspection
teams
• BdP
• External parties
..
Inspection
teams
• BdP
• External parties
Responsibilities
Functions
• Oversight and decision
making
• Follow up and monitorize activities progress
• Validate action plans, calendars and decision proposals
• Decide on proposed issues
• Control, coordinate and
promote the execution of
the workstreams
– Calendars and
interdependences
– Risk anticipation and
mitigation
– Problem solving
• Coordinate and monitorize program workstreams
–Calendar, milestones
• Prepare support documents for workstream follow-up
–Calendar, milestones
–Identification of risks, problems and proposal of
mitigation actions, solutions
• Support internal and external communication
• Plan, coordinate and
guarantee activities
execution
– Calendars
– Decision proposals
• Coordinate work execution
–Work planning
–Team constitution and resources allocation
–Problem solution
• Manage external service providers
• Systematize and report status of workstream and
respective courses of action
• Execute courses of
action in the field
– In some cases, done
by external entities
• Implement courses of action
15
3. The financial stability pillar
A structured cascade of regular follow-up meetings was put in place for the overall
duration of the Program
Objective
Steering
committee
 Banco de Portugal (BdP)
 Validate action plans, calendars and decision
proposals
 FMI, EC e ECB
 Bimonthly
 ACP (BdF), BdE, BNB (Central Banks)
 BdP
 Decide on proposed issues
 National experts
 Discuss pending subjects and needs for intervention
 Define corrective measures and next steps
Project
managers
committee
Team
leaders
committee
Technical
Recurrence / Location
 Follow up and monitorize activities progress
 Assess overall SIP progress
PMO
Participants
 BdP Project Managers
 Weekly (Tuesdays 9:00)
 BdP, BCG
 BdP
 Weekly (past) activities status and report meeting for
following week
 BdP Project Managers
 Transversal perspective view of SIP
 Account/consulting firms' representatives
 Problem solving of issues emerging in multiple
Participant Banks
 BdP, BCG
 Overall progress status concerning clients common
to multiple participant banks
 BdP Team Leaders
 Sharing of findings and issues related to clients
common to multiple participant banks
 BCG
 BdP Project Managers
 Share thoughts on relevant cases and methodologies
applied
 BdP Team Leaders
 Identify priority cases for analysis
 Account/consulting firms' representatives
 Weekly
 BdP
 Weekly
 BdP
 Weekly
 Share information/knowledge
 Weekly (past) activities status
External
Status
 Prepare/schedule meeting for the following week
 Solve/discuss potential issues
 Communication of preliminary results
 Participant Bank's representatives
 BdP Team Leader
 Account/consulting firms' representatives
 Weekly
 Participant Bank premises
16
3. The financial stability pillar
3 Major inspection programs made in the last 3 years
OIP (2012)
SIP (2011)
ETRICC (2013)
All credit portfolio
Construction and real estate portfolio
All credit portfolio (excluding retail
mortgage, consumer credit and
sovereign exposures)
Reference date
June 2011
June 2012
April 2013
Population in
scope
€281 Billion
€69 Billion
€93 Billion
% of total asset
65%
16%
23%
Sample for
individual
assessment
51%
56%
48%
5 651
2 856
2 206
# BdP resources
69
31
27
# External
resources
226
98
191
16-dec-2011
3-dec-2012
2-Aug-2013
Scope
# sampled entities
Public disclosure
17
3. The financial stability pillar
Selection of external entities followed rigorous criteria of independence and
work quality
Role
BCG
Has provided ongoing support to the coordination
of workstreams to ensure a successful and
interconnected execution within the predetermined
time frames
Expertise
• Vast experience in setting-up and helping PMO's
of similar nature
– Direct participation as PMO manager for the
Central Bank of Ireland program
• Deep knowledge of Portuguese banking system
PWC
PWC worked alongside Ernst & Young on
the valuation of credit portfolio workstream in
4 participant banks of the Portuguese
banking system
• Independence: PWC does not audit any of the
Participant banks in Portugal
• Direct participation of foreign partners in the UK
program of Asset Protection Scheme
Ernst & Young
Ernst & Young worked alongside PWC on
the valuation of credit portfolio workstream in
4 participant banks of the Portuguese
banking system
• Independence: Ernst & Young does not audit 7 of
the participant banks
• Direct participation of foreign partners with
experience in similar programs (UK, Ireland)
Provide expertise and independent validation
of stress-test models and underlying
assumptions
• Significant experience in similar projects
Oliver Wyman
18
3. The financial stability pillar
Quality and consistency assured by BdP
Define the Terms of Reference (ToR) of the Program
Ensure that the methodology and assumptions defined in the Terms of
Reference are applied in a consistent manner
BdP team's main
objectives
Anticipate potential problems/issues that might compromise the
established schedule and contribute to minimize those issues
Anticipate potential problems and difficulties that may compromise the
work plan determined and contribute to avoid or minimize potential
negative impacts
19
3. The financial stability pillar
BdP approach to prudential supervision
1
Permanent on-site presence
2
Frequent horizontal solvency reviews (QRA and RWA)
3
Forward looking approach (baseline and adverse scenarios)
4
Micro and macro integration
5
External and internal auditors challenging
20
4. Structural reforms
Several structural reforms were implemented
Labor
Market
•
•
•
•
•
•
Examples
Increase in working days: up to 7 additional (3 vacation + 4 holidays)
Reduction of restrictions to individual dismissal: based on performance
Restrictions on automatic extension of collective agreements
Reduction of severance payments to align with EU average (from 30 days to 12 days per year worked
for new permanent contracts; for remaining contracts 18 days per year of service in the first 3 years of the
contract and 12 days for subsequent years)
Unemployment subsidy entitlement period reduced from a maximum of 38 months to 26 months
•
Approval of measures aiming at reducing the costs with energy (partly eliminating the excessive
profits in this sector)
Improve rental market legislation (set transition periods for the convergence of rents and negotiation
mechanisms between landlords and tenants)
Liberalization of the energy and gas market
Judicial
system
•
•
•
•
Adoption of a law on arbitration to facilitate out-of-court settlement
Approval of new Code of Civil Procedure, submitted to Parliament
Adoption of a new Judiciary Map, submitted to Parliament
Reduction of the backlogged cases
Business
environm
ent
•
•
•
•
•
New insolvency code and corporate recovery
New Competition Law harmonized with the EU legal competition framework
Liberalization of regulated professions’ access and exercise
Reduction of firms’ administrative burden: licensing requirements and other legal formalities
Adoption of the new Urban Lease, Renovation works and Urban Rehabilitation Laws
Product
Market
•
21
4. Structural reforms
Long-run potential impact of structural reforms in Portugal
Approach

No model: use
empirical results
from several studies
Results
%
2020
GDP per capita, increase in level in percent at 10-year horizon
PT ~13%
(> 5% after 5 years)
1515
Bouis
and
Duval
(2011)


Gomes
et al
(2011)

Broad range of
reforms that include
reforms in product
and labor market
and reforms of
benefit, tax and
retirements systems
Multi-country DSGE
Model
Reforms of labor
and services market
1010
55
00
Increase in long-term output of 7.8% , after 7 years
(8.6% in case of cross-country coordination of reforms
in the euro area)
Source: Bouis and Duval (2011), OECD Economics Department Working Paper n.º 835; Gomes et al (2011), Banco de Portugal Working Paper n.º 13
22
4. Structural reforms
In a complex society the implementation of structural
reforms takes time
This is further complicated by the fact that
the positive impact on output and
employment of structural reforms is not
immediately visible
The ownership of the reforms by the
society is crucial to break vested interests
23
The Portuguese Adjustment Program
24