The paradigm has completely changed. With the new phase of interest rate hikes, which should be long and could last for years, until 2025 or more, and with the phasing out of sovereign debt purchase programs, the Bank of Portugal (BdP) should break a cycle that has already was long, of income transfers to its shareholder (the state) in the coming years, DN/Dinheiro Vivo discovered.
In 2023, Fernando Medina, the finance minister, will still have about 240 million euros in dividends, plus 134 million euros in current taxes, all referring to the 2022 financial year of the bank controlled by Mário Centeno.
But in 2024, when the central bank’s results are set for this year, that will no longer be the case. The BdP should have no positive profits, nor more dividends, nor taxes to be paid to Finance. And so it will be in the medium term as interest rates rise and remain higher, as expected.
The two headings (dividend and tax) will still make a significant contribution to this year’s revenue (in the public accounts), which could exceed 370 million euros according to Fernando Medina’s 2023 state budget.
But it’s over from here. The Bank of Portugal, as well as the other central banks in the Eurozone, will start making losses (actually this is already happening with the European Central Bank itself or the Bundesbank, the German central bank, the largest in the Eurozone).
In the end, the net result of the GDP should be zero in 2023 and the coming years, because there is a substantial amount of provisions that will be used to keep the balance at zero and therefore no distribution of dividends, nor for the tax payment. .
It is true that the relevant income sent by the BdP to the Treasury consists of dividends calculated annually (usually 80% of the Bank’s result, plus tax on the result).
The amounts involved, which have contributed positively to government accounts, are significant.
Since 2010, BdP has returned €6.7 billion to the “state shareholder”
From 2010 to 2022, the central bank generated about 4.4 billion euros in dividends. And it paid about $2.3 billion in current taxes. In total, the “shareholder” (State) returns about 6.7 billion euros.
In addition, and not least, the Bank of Portugal bought up massive amounts of government debt, lowering the Republic’s interest rates and generating significant debt service savings (an expense that counts when calculating the government budget balance).
More: The ECB kept key interest rates at zero or near zero for almost six years until July 2022, and created several programs to provide liquidity to the financial sector, helping to maintain a massive flow of cheap credit to the economy (households and companies) and anchoring payments to banks at low values.
It was an unprecedented injection of cheap money to combat first the threat of fragmentation in the Eurozone, then the destruction caused by the pandemic lockdowns and, more recently, the consequences of war.
As I said, those days are over. And the Bank of Portugal, as well as the other central banks of the Euro, face this new challenge.
In 2023 and in the short/medium term, central banks around the world, such as BdP, are expected to show negative results (losses) before provisions, as expenditure on liabilities may exceed returns on assets from 2023 onwards.
The return on assets is basically what the BdP earns by holding government bonds and other bonds on the balance sheet until they reach maturity.
Since these bonds mature in four or five years on average, the expected return can be stable.
This is not the case on the passive side. The Bank of Portugal, like the others, will receive new money (from the TARGET system, which is part of the architecture into which the ECB is inserted) at the same interest rates that the ECB defines for the Eurozone. These are rising sharply and should continue to do so.
Therefore, the cost of having this liability is greater than the profits gained from holding assets. Higher enough to drive central bank results (and the BoP) to zero or less.
In a scenario like this, which is new and completely opposite or symmetrical compared to what prevailed until the energy and inflation crisis (exacerbated by the Russian war against Ukraine early last year), the central bank is driven to negative results pushed.
However, according to the DN/DV, the long period of sustained profits enabled central banks (as well as BdP) to create significant financial buffers that could be used to absorb any losses.
The central banks of the Eurozone (including the BoP) will thus use these provisions, if necessary, and to the exact extent necessary to zero the final net results of the following years. The aim is that the central bank does not present negative results.
Source: DN
