Espirito Santo crisis highlights continued struggle in periphery

The eurozone crisis seemed to have peaked after the restructuring of Greek government debt in 2012, and the repeated interventions of the European Central Bank that stabilised government bond yields.

But, persistent recessions in many EU countries have led to falling real estate prices and rising defaults on corporate and retail loans. In theory, banks have been under pressure from regulators to write off non-performing loans (NPLs) or transfer them to 'bad bank' structures, such as Spain’s Fondo de Reestructuración Ordenada Bancaria or Ireland’s National Asset Management Agency. In practice, impairments in many countries have remained stubbornly high.

The level of total impairment charges (TIC) as a percentage of total operating income (TOI) in Portugal is the third highest among the eurozone crisis countries, at almost 66%. Only Ireland and Slovenia have higher rates - Slovenia's official recognition of the scale of its banking crisis came much later.  Slovenian impairments soared as the country undertook an asset quality review in 2013, but other countries are showing signs of recovery (see table).

Impairment charges in Portugal fell by 12.6% in 2013. But the problem is that operating income remains very weak, falling 20.8% last year. As a result, the proportion of TIC to TOI actually rose in Portugal – unlike any other crisis country except Slovenia. As a result, total losses in Portugal deepened in 2013, in contrast to the steep recoveries in Greece and Spain that took both these banking sectors narrowly back into profit.

Only Irish banks lost more money than Portugal in 2013. However, owing to the size of the Portuguese banking sector relative to the economy, Portugal’s losses are a smaller proportion of gross domestic product than those in Slovenia. Even so, the Portuguese government is seeking to ensure that taxpayers will not have to play a significant role in resolving the problems at Espirito Santo.

Read more on Espirito Santo in the story Banco Espírito Santo exposes frailty of eurozone