Novo Banco and the deficit of 2014

The National Statistics released today the second notification of 2015 for the Excessive Deficit Procedure (EDP). Besides reassuring the expected deficit for 2015 to be 2.7% of GDP, which allows the country to leave the EDP (countries with deficit above 3% of GDP), the document’s major revision to the first notification is the inclusion as a capital transfer of the €4.9bn of the Novo Banco (NB) capitalization in the Public Administration’s 2014 deficit, which increases from 4.5% to 7.2% of GDP.

As the sale of NB didn’t materialize within one year, the capitalization was considered in accordance with the general case provided by the Deficit and Debt Manual: a capital injection into a public company.

However, this is an extraordinary measure whose impact is merely statistical if the selling of Novo Banco is able to repay the amount borrowed by the State to create the Resolution Fund that owns the Bank. As soon as the Bank is sold, the Resolution Fund (entity included in the Public Administration) is expected to get back the amount of the capital transfer. According to the National Statistics, As NB is a unit classified in the Financial Corporations sector, the capital transfer has a negative impact in the balance of the GG [General Government] sector and has the symmetrical effect on the balance of the Financial Corporations sector. Contributions from the banks to the Resolution Fund, an entity included in the GG sector, will continue to impact positively the GG balance and negatively the balance of Financial Corporations. The risk lies moreover on the incapacity to sell NB by the Fund’s value. Further risks may also be added for 2015 and 2016 if results of the stress tests made by the ECB (to be released in November) consider the Bank needs to strengthen its ratios, which would eventually require the Government to allocate additional cash to the Fund.

Both the Ministry of Finance and European authorities have already highlighted this one-off operation does not require any additional revenue or expenditure measures to address the Government’s 2014 deficit. The Prime Minister Passos Coelho added that the delay in the selling of Novo Banco ended up to be positive since the Government have been receiving more than € 120 mn in interests, since the bank was not nationalized and the amount borrowed earns interests.

Public debt estimates remains unchanged at 130.2% of GDP in 2014, 1.2 pp above the previous year debt.