LISBON Feb 22 The capital buffers in Portugal's
banks aren't big enough to deal with their bad loans, the
International Monetary Fund warned, and it urged banks to clean
up their balance sheets to help the country grow and cut its
In a report of the fifth monitoring mission following the
end of Portugal's bailout in 2014, the IMF board said that
despite a reduction in risk-weighted assets, Portugal's banks
had the second-lowest capital ratio in the European Union, at
Although total capital in the banking system is above
regulatory requirements, it "appears insufficient to tackle the
likely capital shortfall in the system if non-performing loans
are fully provisioned for", the IMF said.
"A comprehensive balance sheet clean-up" is needed to break
a vicious circle of weak banks, high non-performing loans and
slow growth, the IMF said.
It called on regulators to ensure that banks set ambitious
targets for reducing bad loans and forced them to increase
coverage ratios with additional provisions.
Portugal's banking system is still reeling after the state
had to rescue two lenders in 2014 and 2015.
After years of capital shortages, state-owned Caixa Geral de
Depositos is being recapitalised by 5 billion euros. The largest
listed bank, Millennium bcp, completed a 1.3 billion-
euro capital increase.
The IMF said the Geral de Depositos recapitalisation weighed
on public debt in late 2016, when it rose to 130.5 percent of
gross domestic product, and it expects only a modest reduction
to some 130 percent in 2017.
High public debt complicates the situation in Portugal. It
leaves no fiscal room for the state to finance a "bad bank" for
non-performing assets, so banks have be able to raise additional
private capital themselves. That requires more cost cuts and
measures to improve their weak profitability.
Portugal's economic growth slowed to 1.4 percent last year
from 1.6 percent in 2015 as investment fell and private
consumption slowed. Still, the government says it cut its budget
deficit to 2.1 percent of GDP or less from 4.4 percent in 2015.
It targets 1.6 percent in 2017.
The IMF said that forecast "depends in large part on
optimistic revenue projections, raising risks to execution". It
called for durable spending reforms rather than one-off
adjustments. Its forecast this year's deficit at 2.1 percent.
(Reporting By Andrei Khalip; Editing by Larry King)