CREDIT WILL get costlier, savings interest rates will be lower and business will become more difficult to fund thanks to the worldwide sub-prime crisis claimed a leading banker last week.

Mr. Peter Mottek

Worldwide losses from risky mortgages could eventually cost financial lenders 300 billion dollars while a meltdown in the Spanish property development, housing market and construction industry could have a serious knock-on effect for Portuguese business and lending.      

For too long interest savings rates had been artificially high while loans to business and mortgages had been too cheap – that would change as a consequence as banks became jittery about lending from their 10 per cent capital pots.

However, despite comparing the current credit crisis with the 1930s depression – a tall and highly inaccurate order for anyone to make – Peter Mottek did sound a note of optimism by adding that Portuguese banks and companies could “navigate the hot waters.”

“True leaders are a lot like tea bags, appreciated mostly for their content, especially when standing in a lot of hot water!” he joked.

This was certainly the case for today’s world leaders in the international banking industry. “History may eventually show that the financial crisis that we’ve been experiencing today across the globe is of possibly historic proportions, comparable with the depression of the 1930s, and certainly comparable to the inflationary times of the 1970s,” he warned.

While not felt directly here in Portugal yet, the level of uncertainty in the market today at a global level was “truly unprecedented”.

“Already the world’s largest banks have written off partially 60 billion dollars, mostly due to sub-prime related losses, and the latest estimates now are that could soon exceed some 300 billion dollars,” he said.

This was particularly sensitive when one thought of capital levels which with the largest banks averaged less than 10 per cent, whereas at the turn of the 20th century, the capital levels of the world’s largest banks stood at almost 25 per cent.

An article in the Financial Times by Nile Ferguson, called “The Great Dying Dinosaur” suggesting that the banking fraternity was now in a “Darwinian market”.

So what does it all mean for Portugal? All the banks are driving for profits and competing vociferously for business.

How would the crisis impact the banking community in Portugal and affect Portuguese businesses?

First of all there was the liquidity issue. Liquidity would continue to create pressure in the market in two forms: the availability of money in the markets and the flow of cash; and the availability of credit.

To the chagrin of most bankers, the market in Portugal had been artificially inexpensive on loans and artificially robust on savings.

“Personal savings and business savings are earning much higher interest rates and customers are able to borrow money at artificially low levels,” explained Peter Mottek.

“We think this is going to change because we think the banks can no longer afford to lend to the market below the risk level that the market presents today,” he warned.

As to the near future: competition had been so heavy and so strong that the appetite for growth and new business has continued to be high. “We think in the near term clients can still enjoy getting loans at discount rates and getting savings at inflated rates – but it won’t last.”

The second issue was Spain: What was the contagion effect going to be in Portugal from the crisis effecting Spain?

A real estate meltdown in Spain could have a knock-on effect but not necessarily as serious since in Portugal, “because we haven’t had the ‘ramp-up’ on values that we have seen in the rest of Iberia,” he explained.

If a significant shift in home values is experienced in Spain that would impact on Portugal in three areas: second home sales would fall, new construction would go down, new financing would become more challenging, and there could be some impact on tourism.

On market consolidation: if it were to become more difficult for banks to succeed in this market and continue to make a good living, because the margins go down, there would be some impact on consolidation.

The question was where this consolidation was likely to happen? “We believe that it is not going to happen, as many believe, at the top end of the market - the top five banks have around 80 per cent of the market share - and it’s not going to happen at the very bottom end of the market, where we have ‘niche players’ that can be efficient and nimble,” he predicted.

Instead it was likely to be right in the middle: those middle-sized banks which were in the proverbial ‘dead zone’ where they were too big to be niche players and too small to beneficially effect the market itself.

HM Ambassador Alex Ellis & Dr. Paulo Lowndes Marques

When the combination of credit, with the worries in the Iberian real estate market, and the turmoil created from consolidation were all added together, “it’s going to take our businesses more time to get capital, get funding, and it’s going to cost more money,” He said

Business and banks alike were facing a very challenging time ahead, as a result of this financial crisis, and it meant that leadership was “going to have to prevail”. The good news was that Portugal had outstanding leadership.

“We at Barclays are absolutely delighted to be here with the British-Portuguese Chamber, as we begin our 23rd year in Portugal I expect that we’ll be able to navigate these waters, we’ll still be able to continue to succeed, no matter how hot the water gets,” he concluded.