carlos da silva costa : sovereign debt crisis, risks or opportunities address by mr carlos da silva costa, governor of the bank of portugal, at the 2nd reuterstsf conference : “ sovereign debt crisis, risks or opportunities ”, lisbon, 28 february 2011. * * * according to the latest data available for 2010, the portuguese economic situation can be summarised as follows : a fiscal deficit estimated at around 7 % of gdp compared with deficits of 6. 3 % in the euro area and 10. 5 % in the uk ; a public debt around 83 % of gdp, compared with 84. 1 % in the euro area ; a growth rate of 1. 4 % in 2010, compared with 1. 8 % in the euro area ; financing needs of the portuguese economy as measured by the combined current and capital account amounting to 8. 7 % of gdp in 2010 ; a net debtor international investment position above 100 % of gdp, and a net external debt equivalent to 85. 3 % of gdp in 2010, of which 48. 0 % corresponds to the general government sector. these figures only provide a snapshot, which needs to be considered in the context of the underlying driving forces. more specifically, to understand where we are today, we need to know where we came from and where we are going. there is no other way to assess and understand the size of the challenges faced by the portuguese economy and the consistency of its path. therefore, it is important to remember that in the last decade the portuguese economy recorded : a weak rate of growth in the years that preceded the international crisis – with an annual average growth rate of 1 % between 2001 and 2008 ; a steady decline in the potential growth rate, as a reflection of the reduction in the growth of labour productivity, capital and total factor productivity ; an increase in public indebtedness from 48. 7 % of gdp in 2000 to nearly 83 % of gdp in 2010, mirroring a rise in public expenditure of virtually 8 percentage points during the same period. this despite a reduction in debt servicing costs resulting from the adoption of the euro in conjunction with the benefits of the so - called great moderation period ; an increasing level of household indebtedness, which rose from less than 80 % of disposable income in 1999 to more than 120 % in 2008, reflecting easier access to consumer and mortgage credit, in terms of both volume and cost ; a rising level of external indebtedness, resulting from recurrent

the sovereign debt crisis. second, the capital adequacy of banks is a dynamic reality. therefore, it must be seen in the context of both the current level of balance sheet risk and of the negative impact that a deterioration in the portuguese economic situation may have on the quality of assets. moreover, it must also be viewed in terms of the additional capital requirements arising from the new prudential rules, known as basel iii, and the fact that investors and their counterparties tend to consider the new prudential rules as financial soundness benchmarks even before their enforcement. in this context, portuguese banks must bear in mind that the environment in which they operate imposes the narrowing of the gap between deposits and loans and an increase in own funds. portuguese banks should therefore embark on orderly de - leveraging, through a selective sale of assets, namely credits, that will allow them to soften the impact on the financing of the productive sector, in particular of the companies more dependent on bank financing. in this bis central bankers ’ speeches regard, it would be welcome that the large companies that have or may have access to external financing and to the capital market would reduce their recourse to domestic credit. second, portuguese banks, being aware that this will be key to the assessment by counterparties and investors, should further strengthen their own funds. we all know that conditions in the capital market are particularly difficult. therefore, it is crucial that banks envisage other ways of expanding or reinforcing their shareholder basis. third, given the critical importance of preserving profitability as well as the rigidity of the financial margin that results from the relative weight of mortgage credit, portuguese banks must pay particular attention to their efficiency ratios. finally, and in the very short term, portuguese banks like the other european banks will undergo very tough tests. the new round of stress tests is aimed at examining bank performance under a far more adverse scenario than in 2010. it is crucial that banks show that capital shortages resulting from the accommodation of losses induced by a weaker economic environment can be adequately met. therefore, and as a result of the commitment by eu member states, we will have to prepare the mechanisms that, if needed, will be activated to reinforce banks ’ own funds. such mechanisms may rely on the individual financial institutions or public funds ( the so - called back - stop facility ). in sum, and as i mentioned at the beginning, the results for 2010 provide a snapshot that must be considered in the