EU presidency – Portugal finds itself in the spotlight for the EU’s post-pandemic recovery
The job of steering the bloc through the huge upheaval caused by the health crisis has fallen to Portugal. But the dispersal of massive sums of EU funding under its recovery plan also once again highlights Portugal’s chequered history regarding good financial housekeeping, including the relative recent BES banking debacle, writes Martin Banks.
Portugal, as holder of the six-month presidency, is currently steering the EU ship towards what most hope will be calmer waters. In February, the Portuguese Prime Minister, António Costa, signed the formal approval of the Recovery and Resilience Facility (RRF).The RRF will be used to fund the national recovery plans of the Member States.
The main instrument of the €750 billion Recovery Fund is the European Recovery and Resilience Facility. Portugal, which was among the first member states to submit its national plan, is to receive €15.3bn in grants, including €13.2bn between now and 2023, through the Recovery and Resilience Facility, the fund’s main instrument for financing reform and investment programmes.
The €13.2bn is to come to Portugal in two tranches, one of €9.1 billion and the other of €4.1bn.
Portugal’s government is considering using loans from the European Recovery Fund to make €4.3 billion in investments in affordable public housing, support for business and railway rolling stock.
Costa recently told MEPs that EU’s Recovery and Resilience Facility is a ‘vitamin’ to aid Europe’s economic revival.
He also hopes it will help aid recovery in Portugal which, in recent years, has been trending as one of the most successful destinations for foreign investors. One of the main reasons is because of Portugal’s legal environment, political, social, and economic stability. Each of these help encourage foreign investors.
COVID-19 came to suspend a steady and continuous growth of this foreign investment stream in Portugal.
At this point it is probably worth revisiting the BES case in some detail, not least because of its capacity to shed light on the political issues surrounding the aims of the European project, especially for the banking system.
In August 2014, Portugal decided to put the bank Banco Espírito Santo (BES) into resolution under the Portuguese resolution framework and determined the strategy for its resolution. To enable an orderly resolution, Portugal designed a number of support measures, including State aid for the transfer of certain BES assets to a bridge bank – Novo Banco.
In 2017, the European Commission approved, under EU state aid rules, Portuguese aid for the sale of Novo Banco. The measures allowed the new private owner to launch its ambitious restructuring plan aimed at ensuring the long-term viability of the bank, while limiting distortions to competition.
The rescue, which came a year after Greece spent €28bn to rescue four of its banks, suggested that despite years of efforts to improve the eurozone’s financial and economic management, hidden problems still may lurk in the region’s banking systems. Much of the Espirito Santo group, whose activities included tourism, health and agriculture, sought bankruptcy protection in a remarkable fall from grace of one of Europe’s most prominent business clans. By using the bank resolution fund, Portuguese authorities hoped to limit the political fallout of using taxpayer money to prop up a bank.
UK-based financial expert Thomas Hale said: “The Novo Banco case should provide extremely important precedents regarding the capacity of the “public interest” to overwhelm contractual claims or the benefits afforded by legal processes.
“The overall debacle is not so much the story of a rogue peripheral regulator flying in the face of international capital but an early expression of new European banking legislative principles which complicate the rule of law itself.”
Portuguese political commentator, Conceicao Gomes, goes on to say that, as in other countries, in Portugal interest in the debate on the redefinition of territorial jurisdiction has also increased. The current Government has placed the reform of the judicial organization and the redefinition of territorial jurisdiction on the political agenda.
Reform of the Portuguese administrative courts is a priority set out by the EU to Portugal. Some have cited the BES case as a prime example of why these courts need reform.
The Portuguese courts, like in the early 1990s, are still mostly preoccupied with “low intensity disputes”. In the period 2000-2004, civil litigation represented on average 83% of all cases brought before the courts. Portuguese courts are still overused when it comes to debt claims, which largely dominate civil litigation.
Gomes says that one of the major problems faced by the Portuguese courts is that of “management inabilities”.
The reform of the judicial organization, he argues, may be an excellent way to introduce changes in the management of human and material resources and of judicial cases.
He adds: “Its main goal must be to seek the better quality, efficiency and effectiveness of and wider access to the law and to justice, thus allowing for the re-centring of the courts’ functions on high intensity disputes, on the response to serious crime and on the promotion and defence of citizens’ rights.”
Novo Banco, meanwhile, has reportedly sent letters out to the hundreds of small investors caught out in the BES banking debacle, telling them that they have to “reclaim credits” from various banking subsidiaries based in Luxembourg.
Financial journalist Peter Wise says that the ‘victims’ of this aspect of the BES collapse were predominantly “middle-aged, middle class” people – many of whom lost their life savings, been forced to close small businesses and/or are struggling to support elderly relatives”.
Administrative reform has been a big issue for recent Portuguese Governments and there has been international and domestic pressures for change and reform in the Portuguese public administration.
Whether the BES case proves to be an isolated case in which problems had grown too big to be hidden any more or as something more systematic and endemic remains to be seen.
But most experts do agree that the issue of BES is a clear warning sign to potential foreign investors in Portugal.