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Cablegate: Portugal: Financial Crisis Causes Strain but No

VZCZCXRO1397
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHLI #2636 2821539
ZNR UUUUU ZZH
R 081539Z OCT 08
FM AMEMBASSY LISBON
TO RUEHC/SECSTATE WASHDC 7073
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS LISBON 002636

SIPDIS

E.O. 12958: N/A
TAGS: PGOV PO
SUBJECT: PORTUGAL: FINANCIAL CRISIS CAUSES STRAIN BUT NO
IMPENDING DOOM

SUMMARY
-------
1. Portuguese banks and financial institutions have adequate
capital to ensure solvency and limited exposure to the
devalued assets plaguing larger financial institutions
elsewhere in Europe, yet the Portuguese public is nervous
about recent difficulties of large U.S. and European
institutions and the stock market's 9.86 percent decline on
October 6 was the largest in its 15-year history. The GOP
response is to focus on increased regulation and guarantees
to strengthen confidence in the financial sector. However,
the tighter global credit market is slowing economic activity
and threatens to stall a Portuguese economy that had been
growing slowly but steadily since 2003. End summary.

LOW EXPOSURE, LOW RISK, BUT STOCKS REFLECT LOW CONFIDENCE
--------------------------------------------- ------------
2. Although continuing to lag behind average EU rates for
growth and competitiveness, the Portuguese economy is
weathering the current financial crisis well. Portuguese
financial institutions are not heavily invested in
mortgage-backed securities or faltering financial
institutions - while over fifty Portuguese funds have some
level of exposure, the total value of these investments is
just over 87 million euros (USD 120 million), and there are
adequate capital reserves on hand to ensure solvency.

3. Despite the relative security of Portuguese banks, the
public is increasingly concerned about the highly-publicized
failures and bailouts of large U.S. and European financial
institutions. The financial sector and the Ministry of
Finance have responded with an extensive media campaign
underscoring the low risk of failure of Portuguese
institutions and publicizing existing protections for
depositors, such as the Guaranteed Deposit Fund. This Fund,
participation in which is mandatory for all deposit
institutions, is similar to FDIC insurance and guarantees
deposits up to 25,000 euros (USD 34,500) per account. On
October 6 Finance Minister Teixeira dos Santos said all
Portuguese deposits will be guaranteed, but a new guaranteed
deposit ceiling will be set after the European Commission
makes its recommendation.

4. Declining public confidence in the world economy and in
governments' ability to control the crisis is also reflected
in stocks here, which on October 6 plunged 9.86 percent, the
largest one-day loss in this market's 15-year history. This
decline in Portugal's principal index exceeded losses
suffered the same day by stock markets in the U.S. and EU
countries much more heavily invested in mortgage-backed
securities.

STRENGTHENING REGULATION, BUT TIGHTER CREDIT A SQUEEZE
--------------------------------------------- ---------
5. GOP response to the crisis has focused on strengthening
regulation and oversight in the financial sector. Finance
Minister Teixeira dos Santos is advocating increased
reporting of exposure to questionable assets and overall
financial health, shareholder endorsement of executive
compensation, and higher penalties for financial malfeasance.

6. However, Portugal is not immune to the impact of the
tightening global credit market. For the April-June 2008
quarter, new mortgage applications declined almost sixteen
percent from the same period last year, and new mortgages
issued for June 2008 were the fewest since 2004. Existing
homeowners are also feeling the pinch because most mortgages
here have variable interest rates. Continuing pressure in
credit markets could stall the slow but steady Portuguese
economic upswing since 2003, and this concern is reflected in
the International Monetary Fund's downward revision of
projected growth for Portugal to 0.7 percent for 2008 and 0.6
percent for 2009.

COMMENT
-------
7. Portugal's conservatism has served the country well in
this crisis, but the country cannot avoid the impacts of the
global credit squeeze and eroding public confidence. We
expect economic growth to slow here, but we do not foresee
the spectacular institutional meltdowns seen in other
countries. End comment.
STEPHENSON

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