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 
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¶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