May 13, 2020 / 1:51 PM / 16 days ago

Portugal to extend loan moratorium to avoid jump in bad loans, Centeno says

LISBON, May 13 (Reuters) - Portugal will extend its six-month suspension on debt repayments beyond September for as long as it takes to avoid jeopardising the banking system with a jump in bad loans when the measure is lifted, Finance Minister Mario Centeno said on Wednesday.

The suspension, in place since March, can be applied for on bank loans to companies and individuals, including on household mortgages.

Originally due to expire in September, the scheme has already led to the postponement of 12 billion euros in interest and capital payments, the Finance Ministry estimates.

Centeno said the indefinite extension was aimed at ensuring that any surge in bad loans “can occur at a time when the trajectory of the Portuguese economy, in the global context, is more certain”.

“We are ensuring that we do not put banking institutions or their customers at risk,” he said.

The chief executives of Portugal’s five largest banks, which together make up 80% of the country’s banking system, had called for such an extension during parliamentary hearings last month.

“These moratoriums are crucial ... and will have to be adapted over time, and extended. That’s exactly what we’re going to do,” Centeno said.

The country, which has around 28,000 confirmed coronavirus cases and just under 1,200 deaths, is expected to suffer an 8% blow to its GDP in 2020, according to the International Monetary Fund. The European Commission estimates a 6.8% contraction.

The country’s banking sector is still scarred from a debt crisis and spike in non-performing loans (NPLs) after the 2010-13 recession, which put great pressure on capital ratios and led to the collapse of banks such as Banif in 2015.

Portuguese banks have since battled to reduce NPLs, bringing them down to a total of 17.2 billion euros ($18.7 billion) in December 2019, from a peak of 50 billion euros in June 2016.

Although the NPL ratio for Portugal’s banks dropped to 6.1% of total credit in December, from 17.9% in mid-2016, it is still about twice the European average.

Portugal’s banks have lifted their average common equity Tier 1 solvency ratio to 14.1% in 2019, from 7.8% in 2011.

Centeno said the recovery strategy for the Portuguese economy would need to be aligned with and coordinated at European level.

“We will not be able to recover our economy until the European single market, to which we export 75% of what we produce, recovers,” he said. (Reporting by Sérgio Gonçalves; Editing by Victoria Waldersee and Alison Williams)

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