Wednesday 30 March 2011

Privatizing Caixa

Caixa Geral de Depositos is one of the largest Portuguese banks, and it is owned by the State. It is a profitable bank with significant market value, and the Social-Democratic Party suggested privatizing it a few days ago. The immediate goal is to raise revenue to reduce the public debt. Pedro Lains and Alvaro Santos Pereira, contributors to this blog, have written about it elsewhere, against and in favor of privatization, respectively.

This debate puzzles me. When I think of the big policy challenges in the Portuguese financial markets in the next 6-12 months, it is not privatizing the State bank that comes to my mind. Rather, it is whether or not to (partially) nationalize the private banks.

Same topic, opposite sign.


  1. @Ricardo Reis

    I believe the general focus is still on public debt/deficits and this explains the debate that puzzles you. The necessary "mind setting shift" towards the aggregate national balance sheet did not happen yet.


  2. I think you missed the point here.

    Caixa is one of Portugal "buco nero"'s (Parmalat SPV where losses were hidden).

    Caixa special status of "independence" from government policy ended when Armando Vara (renown technocrat and banker) skyrocketing career sent him from bank teller in Viana do Castelo to Caixa's board.

    Caixa started building direct (Cimpor, EDP, GALP) and indirect stakes (through equity financing e.g Berardo in BCP) in Portuguese strategic companies. The bank also started financing (debt and equity) delusional projects such as La Seda where Caixa has several hundred million EUR of impairments (not yet recognized). As an example, the La Seda project in Sines was announced 2/3 years ago by former minister Manuel Pinho receiving huge media attention. The delusional package included "foreign investment", "high tech jobs", decrease regional wealth disparities... La Seda went bankrupt before anything was done and Caixa has restructured the company 2 times to avoid recognizing the impairments.

    Privatizing Caixa is not about raising revenue and reducing debt. It is about trying to end the madness (at least partially).

  3. A small detail that, by itself, shows that it is also mad to think about privatizing CGD: who would buy it, at this moment?

  4. I share the same question, but for different motives.
    My view:

    - CGD has a role in getting deposits, people trust it, based on history (that's the main point of Pedro Lains);

    - CGD has had a role as "instrument" for government policy -this is the point of Hayek abouve, but besides these examples, there is a systematic and quantified view of this role in F Barros and L Modesto 1999 research paper (see my post at for the full reference);

    - raising revenue this way is small relative to public debt - the point of Ricardo;

    - we have more important matters to solve than this one - the point of Francesco above

    - Scarcity of funds for loans makes more relevant this direct instrument of the government, unless we believe the government will severely abuse of it; but then the partial privatization would change little on this, so either full privatization or none seems to make more sense as options.

    At this point, instead of a political fight for this privatization, I would prefer efforts to be directed elsewhere.

  5. Thats a very good point that you know the answer... nobody. Caixa cant be privatised, it should though. Claiming it shouldnt be privatised because its profitable like members of this blog have suggested... pls give me a break.

    If anything Caixa could be significantly downsized, slowly and piece by piece but I strongly doubt there is political will to do it.

    As to nationalize private banks... Well, thats really a non issue at this point and I dont see the point of discussing it. The country as a whole (both public and private sector) is insolvent. Merging the insolvent public sector balance sheet with the insolvent financial sector BS wont transform it into roses...

    The (painful) "solution" will, obviously, be some form of default with an haircut on debt or withdrawal from the Euro. Meanwhile we will be hiding our head on the sand and prolonging the suffering.

  6. Leaving the euro is really a non-option at this stage; having debts in euros and devaluating against the euro would be a solution? better do the haircut inside the euro.

  7. Well, the longer we take to choose the haircut route the higher the probability of leaving the Euro. The same national politicians that today say leaving the Eur is not an option will be saying tomorrow (when GDP keeps falling, deficits increasing, therefore austerity measures increase and unemployment stays high) that we must leave the EUR and the EUR was the root of all problems (along with speculators and rating agencies of course).

    My argument in this discussion is not that one or the other solution is better. Im just putting myself in a Fortune Teller spot and predicting that default/restructuring is the only option. For me this seems quite obvious if we take into account what history tells us about countries with the public and private debt like Portugal has currently (as per This Time is Different that you certainly have read).

    So assuming that the current level of debt is unsustainable, like I am assuming, the default can either be in real terms or nominal terms.

    As you know we cant choose the path to inflate away our debt so we are left with the very painful nominal default of our debt. Within a nominal default there are basically 2 routes, haircut/restructuring within Eur or leaving the EUR.

    I guess like any other Portuguese I would rather not have a default but reality is a bitch and is catching up.

    If you ask me if I give any probability that a default doesnt occur within 3 years I would say there is still a low probability within 2 scenarios i) Federalism (the US way) which I dont think its feasible in such a short time ii) 1926 all over again which I dont give a high probability of happening either for the time being although our politicians are trying very hard to repeat the footsteps of the 1st Republic.

  8. Still the same claim: "Portuguese state and families are insolvent." This statement very much lacks of solid evidence.
    1- Families and companies bad debt is still under 5% of all credit, which is, according to international standards, a perfectly manageable figure. Problems with private loans defaults, both from companies and families are due lousy economic policies and usurious tax policy and rates, which have eroded companies’ profitability and international competitiveness. Not to mention absurd context-costs.
    2- State is very insolvent, because has been for many years financing investments and current expenses with international public debt.
    3- Portuguese banks are facing international funding issues by state insolvency contagion. They passed last summer ECB stress tests and every indicator point to same result for this year’s harder stress tests.
    I hope for more objective and reasoned comments and opinions in this blog.
    By the way, none of CGD’s against privatisation arguments is sound. I can’t recall any modern democracy with growing economy (or balanced budget) with a public bank competing in market arena as if it was private?

  9. just a small point, history seems to tell that all of this is not very different from 1892, see the comparison (in portuguese, sorry) by
    Maria Eugenia Mata:

  10. You comment is a bit confusing you first start to deny the insolvency statement but in 1) and 2) you acknowledge problems in private and insolvency in public sector due government policies. The blaming game is very Portuguese but has nothing to do with my previous comment.

    Anyway, if you think delinquency rates being low now is a good indicator you should look at subprime, Alt A and prime mortgage delinquencies in the US back in 2006. That number by itself means nothing (either way). We need to look the credit/liquidity enviroment and the leverage in private and public balance sheets which in Portugal seems pretty easy to analyse, liquidity dried except for short term ecb collateralized financing and overleveraged balance sheets at both public and private level (by any historical standards and also comparing with other developed countries total debt to gdp level). External debt to gdp is also quite high and savings rate quite low so its a great combination for the perfect storm. To aggravate this situation we dont have monetary policy tools or control over our currency which in practice is working as if we had a pegged currency and foreign denominated debt. We cant devalue our currency and even if we could, eventually, then all our debt would be in foreign denominated currency.

    Comment to number 3 is pretty short. If you believe the stress tests are an indicator of anything you might as well believe in Santa Claus.

    Note: Im not a member of the blog so the less objective and reasoned comments are entirely my responsability.

  11. But thats exactly Reinahrt and Rogoff's point in the book. Its never different. Portugal defaulted a few times during the 19th century and given the debt levels today we will probably default/restructure again.

  12. @Hayek

    Objective and reasoned. I still believe the first priority is to secure reasonable funding for at least 5 years. Portugal needs more than a balance sheet relief, it must change its dynamics. If access to reasonable funding proves to be not possible then we will think of a restructuring.

  13. Ok, I concede. Efforts to be short ended on lack of accuracy and clarity.

    The increasing families and companies’ insolvency are not (yet) at dangerous levels. They are still manageable issues.
    The problem is that state insolvency led to private banks and private companies international funding access pretty serious troubles, otherwise wouldn’t apply.
    One must believe stress tests would mean something for somebody! What would be the point to submit European banks to it? I can see your point, but I disagree on the obvious implications.

    I’m sorry for some lesser economical thinking. But I’m a manager and I tend to analyse bottom-up, once I face daily, financial real operative issues, due banks incapacity to decide on short or long term industry financing for perfectly productive and viable companies who seek necessary leverage to access international markets. This is the real economy unemployment crisis source, and growing insolvency.

    I really don’t care for any scapegoat. I’m just looking forward for some “small” common sense to set up stable, legal and tax framework, which allow us to invest, be profitable, increase employment and develop international activities to assure some sustainable growth.

  14. Lets see the cajas example.

    2010 stress tests conclusions (july?)
    5 cajas failed the tests and 1.8bln EUR of capital was needed

    Until January they used 11.6bln of the recapitalization fund.

    Number of cajas was reduced from 35 to 17 through mergers.

    The government said last month they need further 15bln (so in less than a year 25bln more than forecast), Morgan Stanley said they need further 40bln (so 50bln more than forecast) and according to an independent reasearch study (usually more reliable than the sell side investment banks and governments because they make a living getting it right for their clients) the true recapitalization numbers are north of 100 bln...

    You have to agree with me that it wasnt that much of a stress test was it?

    We can go through the Irish financial system if you want. Im sure it will be as fun.

  15. BTW, here's the full nationalization of the Irish banking sector:

  16. Please refer to the below post on the stress tests... Stress tests predictions were almost as good as Teixeira dos Santos prediction in 2008 that the crisis would not reach Portugal.