Portugal’s battling Costas

Ruling Socialists accuse the governor of misconduct as they struggle to prop up the economy and the banks.

LISBON — Portugal’s central bank chief Carlos Costa is under attack from the leftist government of Prime Minister António Costa, in a battle reflecting divergences over how to spur growth and prop up a shaky financial sector.

Ostensibly the fight is over Bank of Portugal Governor Carlos Costa’s role in a bank collapse last December that left taxpayers with a €2.2 billion bill. More importantly, perhaps, he is an awkward reminder of the austerity policies of the previous center-right government, at a time when António Costa’s six-month-old Socialist administration is attempting to “turn the page.”

The clash of the Costas comes as Portugal seeks to shore up its fragile banks, a key plank in the minority government’s efforts to meet eurozone budget goals, spur growth and placate two far-left parties whose support the prime minister needs to survive.

Finance Minister Mário Centeno has repeated accusations by a junior minister that the central bank governor committed a “serious failing,” following revelations that Carlos Costa had recommended — without informing the government — that the European Central Bank should cut funding for the moribund Portuguese bank Banif.

Centeno’s wording was significant: Committing “serious misconduct” is one of the few grounds for dismissing a eurozone central bank governor.

The center-right opposition has hit back by accusing Centeno of lying to a parliamentary committee investigating the Banif collapse and of favoring Banco Santander, the Spanish bank that snapped up the remnants of the Portuguese lender for €150 million.

Both men denied any wrongdoing Tuesday when they were hauled before the committee for a second round of grilling.

Carlos Costa said ECB confidentiality rules prevented him from keeping the government informed of his talks there.

“I put it down to a misunderstanding,” he said of the government attacks on him.

“I don’t think it was anybody’s intention to undermine the independence of the Bank of Portugal at the risk of putting the country in trouble,” Costa added with a wry smile.

The clear suggestion was that a move to oust him won’t help the reputation of a country whose finances are already prompting international unease.

Risk of slippage

Among a slew of recent cautions, a European Commission report published Monday warns of “a risk of a significant deviation” from deficit-cutting commitments and says “structural reforms [have] lost momentum.”

It blasts government plans to raise the minimum wage, hike public-sector salaries and re-introduce a 35-hour limit to the working week.

António Costa’s government dismissed the report as outdated and rejects the report’s call for extra austerity measures — which Portuguese media say could entail €700 million in additional cuts this year.

The Commission is not alone in expressing concern.

“There has been a fiscal relaxation in the last two years which clearly goes in the wrong direction,” Poul Thomsen, head of the International Monetary Fund’s European department, told a news conference Friday in Washington. “Additional measures are needed.”

The Organization for Economic Cooperation and Development this week warned Portugal needs “a second wave of structural reforms.” A report from the ratings agency Fitch cautioned Portugal and Italy are being left behind as Spain and Ireland bounce back from the eurozone periphery crisis.

A key test will come on April 29, when Canada’s DBRS ratings agency reviews its assessment of Portugal’s debt-repayment ability.

It’s the only leading agency keeping Portugal’s rating above junk level. A downgrade could cut off ECB funding and force Lisbon to seek a a new bailout.

So far, signs are positive. “We remain fairly sanguine,” Fergus McCormick, DBRS head of sovereign ratings, told POLITICO.

“We have two concerns: one, the possibility of fiscal slippage — if it’s significant that would not be good; second, whether or not you have a functioning coalition [and are] on the same page as the European Commission,” he said from New York.

Lisbon’s “fairly constructive” dialogue with the Commission, “gives us comfort,” added McCormick, who met with a senior Portuguese delegation in Washington over the weekend.

Matador

One thing Portugal cannot afford is another bank collapse. The financial sector is struggling with bad debts and low profits. The government is mulling the formation of a “bad bank” to absorb nonperforming loans estimated to total €20 billion. It’s looking closely at the fund Italy set up this month to shore up its struggling banks.

“The Italian case is a bit of a good example for us,” Centeno said on his trip to Washington. “We are in contact with the same advisers that worked with the Italian government.”

Badly needed capital is coming over the border from Spanish banks keen to invest in Portugal.

After the government tweaked the rules in its favor, Barcelona-based La Caixa looks poised to win a long and bitter battle with Isabel dos Santos, the billionaire daughter of Angola’s president, for control of Portugal’s fifth-largest bank, BPI.

Santander is already Portugal’s third-largest bank. Overall, Spanish banks are estimated to control about a quarter of the sector, with €59 billion invested.

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However, some Portuguese are growing prickly over Spain’s financial influence.

“There’s a risk Portugal’s banking sector will be dominated by Spanish banks. This is in no way good for the Portuguese economy,” Luís Marques Mendes, former leader of the opposition Social Democratic Party, told SIC television.

A cartoon in the weekly Expresso newspaper showed a matador daubing Portugal’s rooster symbol in the red-and-yellow colors of the Spanish flag. Politicians on the left and right urge the government to resist an espanholização of the banking sector.

The flurry of financial nationalism is putting António Costa in a spot.

On the one hand Spanish capital could help bolster the banks and give a boost to government coffers. Spanish banks look mostly likely to buy loss-making Novo Banco, whose sale would help the state recover some of the €3.9 billion loan it sunk into a bailout of the lender in 2014.

But Costa’s far-left allies would rather the government nationalize Novo Banco.

The prime minister’s problems are not just economic. A spate of political mishaps this month has left the government facing accusations of amateurism and arrogance.

They included the forced resignation of the culture minister, João Soares, after he repeatedly threatened violence against a pair of critical journalists; revelations that António Costa eased a lawyer friend into a well-paid government consultant position; and a spat over gay rights in the military that saw the army commander angrily step down.

None of which appears to have dented the prime minister’s popularity: Costa’s approval rating is up 5.5 points to 42.2 percent, according to a poll in Saturday’s Expresso, making him the most popular party leader. That may explain why he feels confident enough to take on his namesake at the central bank.