Week in Review & Week Ahead 11-14 August

WEEK IN REVIEW

In the beginning of the week, authorities announced the restructure model designed for the Espírito Santo Bank (BES), after the bank’s first semester report was released last week with numbers all worse than expected. The solution designed by the Bank of Portugal under the guidance of the ECB and the EU Commission involves setting up two banks, one, called “Novo Banco”, held by the Portuguese financial sector through the recently created resolution fund and partly financed by a loan from the State, which will receive all assets from Banco Espírito Santo (BES) except the most risky ones. All assets considered as “toxic” will be in the “bad bank”. These risky assets belong to Banco Espírito Santo SA and are held by BES shareholders. Yields on Portuguese 10-year bonds were affected rising significantly during the week to 3.90% after 3.62% on Monday. PSI 20 also accumulated further losses, declining 6.7% from Monday to Friday. You can read here Macrometria’s full comment on the BES situation.

In this week’s meeting, the ECB kept interest rates unchanged as in July, after the changes recorded in June. Questioned on the BES case, Mario Draghi was short in words but congratulated the swift action taken by authorities to avoid an “incident” to become a “systemic incident” to the banking system in Portugal and to the markets in general. Draghi added that there is still a lot of work to do about the BES case, “in terms especially of transferring the assets between the two entities and the prices at which they’ll be transferred, the treatment of the exposure in Angola”. Regarding the economic recovery, Draghi broadly kept past month’s analysis, mentioning data volatility and the fragility and unevenness of the recovery. Risks for growth remain mainly on the downside.

In Portugal, the unemployment rate in Q2 fell sharply to 13.9% of the labor force after the 15.1% recorded in Q1. The unemployment rate fell to levels of Q4 2011, when it started to grow fast reaching worrisome values. The decline in this quarter’s rate was largely conducted by the rise in the employed population (2.0%qoq), which are very good news for Portugal, though it may be partly related with the Easter being in Q2 this year. The labor force rose 0.6%qoq, also contributing for the unemployment rate to decline.

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WEEK AHEAD August 11th-14th

  • August 12 (National Statistics): The CPI for July will be released. Despite the ultra-loose monetary policy announced in June, inflation in Portugal and in the Euro area continues to be very low.  Preliminary numbers estimated that Euro area inflation fell 0.1pp to 0.4%yoy in July. In Portugal, inflation was 0.4%yoy in June.
  • August 14 (National Statistics, Eurostat): the Q2 GDP flash estimate for Portugal and the Euro area is the most waited release in the week ahead. In Portugal, short-term activity data is mixed and suggests a slight rebound in GDP relatively to Q1, but overall risks are on the downside. Risks for Q3 2014 have been also rising as the BES case is likely to affect both household and firms’ confidence.