Political uncertainty: a new risk to the financial stability of the country, according to the Bank of Portugal.

Recent political uncertainty in the country has become a new source of risk for financial stability, the Bank of Portugal said in a report published on Wednesday.

The intervention of STAUDE/LUSTAUDE/LYUSAKThe political crisis of uncertainty facing the country is a new source of risk for financial stability, the Bank of Portugal said in a report published on Wednesday. This risk is mitigated by the "expected approval of the state budget for2024 proposed by the current government," but the financial regulator still said it is a threat that has joined the risks associated with inflation and military conflicts in Ukraine and the Middle East.

In recent months, "risks to financial stability have increased," acknowledges the Bank of Portugal, due to "restrictiveness of monetary and credit policy, slowing economic activity and, recently, political uncertainty." This diagnosis was made in the latest Financial Stability Report..

Bank of Portugal emphasizes

Despite the trend of decreasing inflation, it remains above the target set by the European Central Bank. Additionally, "the military conflicts occurring in Ukraine and the Middle East complicate policy implementation due to their potential impact on inflation and economic activity."

The presentation of this Financial Stability Report took place the week after it became known that Mario Centeno had been invited to lead the government following the announcement of Antonio Costa's departure.

Daughter of the ethics of the Bank of Portugal

She decided that "the governor acted with the necessary caution" in light of this invitation, but warned that there could be damage to the reputation of the Bank of Portugal due to "political-media developments." Centeno was asked by journalists about the conclusion of the ethics committee and possible actions from the ECB at a press conference on Wednesday. "There is a statement from the Board of Directors of the Bank of Portugal, which contains all the necessary comments regarding the conclusion of the ethics committee," said Mário Centeno, adding only that "as long as the institutions are functioning, the Bank of Portugal feels very comfortable." At the press conference, he emphasized that all questions should be related to the report on financial stability.

Regarding the issue of the political crisis, Mário Centeno stated that parliamentary terms that do not reach their end never contribute to the stability and predictability that are "intangible assets" in our society and support economic growth. Furthermore, Mário Centeno said that "when a country like Portugal appears in the news with headlines related to the word 'corruption', we should not think about ourselves, we should think about the country.

In its report, the Bank of Portugal

It notes that "the risks associated with increased uncertainty highlight the advantages of the adjustment that the Portuguese economy has undergone over the past decade, not only for various institutional sectors but also for supporting this trajectory," according to the November financial stability report. In practice, these factors "could lead to a decrease in asset values and an increase in risk premiums in international financial markets," which, if confirmed, would impact economic activity and bank balances, potentially leading to an increase in defaults and stricter financing requirements. The regulator, led by Mário Centeno, identifies four main "risks and vulnerabilities" that could affect financial stability.

Regarding the last point, the Bank of Portugal announced last week that it will require banks to maintain a "sectoral reserve for systemic risk of 4% of the amount of risk-weighted positions in the portfolios of individuals, secured by real estate intended for housing, located in Portugal, and applicable to institutions using internal models for calculating capital requirements (IRB, Internal-Ratings-based)." In simple terms, this is "additional protection" that banks must create to prevent the negative impact of a potential correction in housing prices (which typically serves as collateral for mortgage lending).

The report on financial stability was presented on Wednesday at a press conference held by Mário Centeno in Lisbon. On Tuesday, Mário Centeno emphasized that instability "does not align with economic growth."