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The Public Finance Council (PCP) warned on Monday that there is a risk that, once the moratoriums are over, the financial sector could incur losses that force the state to provide financial support. This is one of the main risks that cloud the execution of the next State Budget, in the terms proposed by the Government. And the PCP once again complains about the lack of transparency in the document screening the film for the next fiscal year.
There are risks that “spending with Novo Banco and with TAP is higher than that considered in the forecast for 2021 in national accounts” and the budget may also be questioned by the degree of activation of the guarantees in the credit lines in which the state has given public guarantee. However, affirms the PCP in the analysis of the 2021 State Budget proposal, “of more uncertain dimensions, the risk associated with the default of credit granted by banks to economic operators is highlighted”.
“The eventual inability of these agents to not undertake commitments can result in losses for the Portuguese financial system and, consequently, forcing state intervention, through financial support”, the organization fears.
According to the most recent data from Banco de Portugal, which refer to mid-June, around 22% of the banks’ loan portfolio was in default, a figure in the order of 39 billion euros. The agency rating DBRS has recently indicated that Portuguese banking is that which, in the European context, has a greater relative weight than loans in default, in proportion to its total assets.
The domestic banking sector has the highest insolvency rate in Europe, says DBRS
This is one of the main “non-negligible downside risks” that the CFP sees in the budget proposal for 2021, a year that will be characterized by “a high degree of uncertainty that remains about the size, scope and duration of the situation pandemic “. This makes it even more crucial that there is “a substantially prudent financial and budgetary management, but it also requires that this management be carried out in accordance with the procedural and basic rules of the Portuguese budget system, since those which are imposed by law budgetary framework. “.
The high economic and social costs of the pandemic continue to justify the use of public programs to support families and the most affected economic operators. However, national and EU public resources must be used judiciously, efficiently and transparently, and there must be timely and comprehensive public disclosure of the implementation of all support instruments, ”the CFP affirms, reiterating the statements made in September.
In the analysis of the CFP, in order to be able to fill the deficit in 2021, defined at 4.3% of GDP, it will be “crucial” to confirm the “recovery of economic activity envisaged by the Government”, as well as “a lower amount of spending related to the pandemic, less support for specific sectors, “other unidentified and unexplained effects” and recovery of the commission paid to the European Financial Stabilization Fund ”.
As far as Novo Banco is concerned, the risk is that the injection made by the Resolution Fund could be higher than the approximately 475 million euros that are expected and that should be injected thanks to annual contributions and sector financing – even so, also without a state loan, the Resolution Fund is a public sector entity, so its accounts are always included in the state budget.
In recent years there have been public loans for 850 million to this body but the money that has come out of the Resolution Fund for the New Bank has been greater: in 2020, for example, it was 1,037 million euros. This amount will rise to 275 million in 2021, according to the bill on the state budget (a figure that can be explained by the net amount between what the Resolution Fund delivers to Novo Banco and the contributions it receives from the banks).
In addition to this reduction in the impact of Novo Banco on public accounts, the CFP states that the state budget is also based on a forecast of a decrease in financial aid to the aviation sector. As the CFP notes, the Ministry of Finance estimates that this year TAP will use all 1,200 million euros of state funding and, for 2021, an impact of 500 million euros is expected for a possible state so that TAP can finance itself on the market.
The situation of scarce public finances, the entity observes, “recommends prudent financial and budgetary management in substantial terms, but also requires that such management be carried out in compliance with the procedural and basic rules of the Portuguese budget system”.
And he remembers a warning he had already made in September: “The high economic and social costs of the pandemic continue to justify the use of public programs to support families and the most affected economic operators “. But, observes the CFP, these public resources – both national and EU – must be used “in a judicious, efficient and transparent way”, and there must be “a timely and complete public communication of the implementation of all the support instruments”.
However, the current budgetary process continues to be marked by these shortcomings, so “it is up to the Public Finance Council to report them again”, that is to say “the defects that occur in terms of budget transparency” and which are detected both in the Budget proposal, or in the supporting documents that accompany it.
What are they? To begin with, the information on the expected budgetary impact of the Covid-19 response measures is “insufficient, as it presents inconsistencies and the distribution of the impact of these measures for the different components of revenue and expenditure in the 2020 estimate that serves as a basis for the budget foreseen for 2021 “.
Hence, the way the government has presented the new unconsolidated spending limits in the multiannual public spending framework undermines budget transparency. This is because it “includes expenditure on financial assets and liabilities” but does not present “proof of the compatibility of these limits with the budgetary objectives underlying the medium-term trajectory of public finances”.
Finally, “transparency is penalized” when there are “unidentified and inexplicable effects” in the accounts, which “make it difficult to measure the ability to achieve the expected evolution of the budget balance in 2021”.
In short, the Public Finance Council notes, the pandemic cannot be an excuse for the government for not providing the information it owes it.
“If it is true that the pandemic crisis, due to its unexpected nature and severity, has forced the adoption of a series of temporary and exceptional response measures, it is important, however, that it is not used as a pretext to postpone, more or less the fundamental legal rules of our budget system ”, underlines the CFP.
And it goes further: “the deterioration in the quality of information manifested in these shortcomings in budget transparency affects the work of the institutions participating in the budget process”, including the assessment that must be made by the Assembly of the Republic – which votes on Wednesday in general the market document.
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