RPT-Fiscal tightening vital for Portugal banks -C.bank

(Repeats story first file at 0000 GMT)

* Bank of Portugal says public finances must be consolidated

* Austerity measures to weigh on economy next year

* Portuguese banks “strongly dependent” on ECB funding

LISBON, Nov 29 (BestGrowthStock) – Portugal’s banks may face an
“intolerable risk” if the country fails to consolidate its
public finances, the Bank of Portugal warned on Tuesday, urging
the sector to reinforce its capital in the years to come.

The Socialist government has adopted painful austerity
measures in next year’s budget to slash the fiscal deficit and
soothe investor concerns that Portugal may become the next euro
zone member to require a bailout, after Greece and Ireland.

But budget execution has been poor so far this year, with
core state sector deficit widening 1.8 percent in the first 10
In its financial stability report, the Bank of Portugal said
failure to consolidate public finances in Portugal would put the
banking sector in jeopardy, especially if the sovereign debt
crisis continued in Europe.

“The risk will become intolerable if we do not see the
implementation of measures that consolidate public finances in a
credible and sustainable way,” it said.

The Bank of Portugal reiterated that the austerity measures,
including higher taxes and wage cuts in the public sector, would
have a recessive impact on the economy next year, although it
said the impact could be mitigated by external demand for
Portuguese products.

An economic downturn would affect the quality of banks’
assets, with less credit for companies and households, whose
incomes are expected to drop.

“Given the prospects of the Portuguese economy, reinforcing
… provisions for losses in credit portfolios, and, above all,
reinforcing the capital of the banking system are essential to
assuring that it remains resistant to adverse shocks,” the
document said.

It also said the banks needed to find new strategies to tap
clients’ resources in order to dampen liquidity risks as
Portuguese banks had been shut out of the interbank funding
market amid jitters over the euro zone periphery.

As a result, the banks had become reliant on European
Central Bank funding. [ID:LDE6AO1Q2]

The Bank of Portugal said that, although the borrowing had
ebbed of late, it was still of “very significant magnitude” and
Portuguese banks were “strongly dependent” on it.
(Reporting by Andrei Khalip; Editing by Kevin Liffey)

RPT-Fiscal tightening vital for Portugal banks -C.bank