carlos da silva costa : overview of economic and financial challenges for portugal address by mr carlos da silva costa, governor of the bank of portugal, at the centenary of credito agricola mutuo, lisbon, 25 may 2011. * * * the celebration of the centenary of credito agricola mutuo ( mutual agricultural credit ) is an appropriate timing : 1. to highlight the relevance of banking activity in modern economies ; 2. to stress the crucial role of trust in the development of this activity ; and 3. to make a brief presentation of the key measures included in the adjustment programme in the field of financial stability – one of the three capstones underlying the adjustment programme and the new growth model of the portuguese economy. 1st – the relevance of banking activity in modern economies credit institutions play an important intermediation role between savers and investors, centralising the resources of the former and channelling them to the funding of investment. this financial intermediation between savings and investment leads to : 1. maturity transformation – deposits with typically short maturities are transformed into longer - term credits ; and 2. liquidity transformation – deposits, liquid, are transformed into credits, more illiquid. through financial intermediation, benefits may be reaped of a scale effect when mobilising savings : multiple low - value individual deposits are transformed into large credit amounts, allowing for the financing of large - scale investments. finally, savings obtained in a given region ( or country ) may be channelled to finance investments in other regions ( or countries ). through this intermediation, the banking activity benefits from economies of scale, making it possible to ensure risk diversification and the implementation of procedures for effective risk management and control. this translates into a reduction of risk for a given remuneration, or, alternatively, a better remuneration of savings for the same level of risk appetite. hence, the banking sector plays a key role in the efficient allocation of resources in a given economy, as well as in the provision of essential services for making payments, thus decisively contributing to sustained economic growth. banking activity can be said to be the “ circulatory system ” of the economy. a healthy – productive and competitive – economy necessarily requires a dynamic and efficient banking sector. 2nd – the crucial importance of trust and the role of regulation and supervision this crucial function of financial intermediation of the banking sector requires a relationship of trust between banking institutions and their customers. it also requires

promote sustained growth in the economy. sustained growth is also indispensable for preserving financial stability, by ensuring the wealth creation needed for paying down debt to the financial system. a protracted recessive environment leads to an increase in bankruptcies and unemployment, creating significant growth in non - performing loans which weakens the banks ’ balance sheets and jeopardises financial stability. in this context, given its responsibilities in supervising the portuguese financial system, banco de portugal has a key role in the portuguese economy ’ s adjustment strategy. banco de portugal ’ s strategy for financial stability aims to respond to four key concerns : • safeguarding the liquidity of the banking system • ensuring capitalisation levels suited to the banks ’ risk profiles • incentivising the banks ’ restructuring, aiming to re - establish adequate profitability in the new business context that resulted from the international financial crisis • preserving the general public ’ s confidence in the system conclusion allow me to conclude. the crisis we find ourselves in is also an opportunity – which we cannot afford to miss – to define a development strategy that sets the portuguese economy on a sustained path of convergence with the average per capita income levels of europe. we need a more productive country that creates employment within a stronger economic and monetary union. the fact that the ongoing adjustment is proceeding in a context of demographic transition and increased globalisation only adds to the urgency and relevance of the challenge. the problem is structural and cannot be resolved with anticyclical policies. any postponement of the adjustment involves new financing needs and the deterioration of public debt, with the consequent further loss of credibility. therefore it is urgent to refocus the public debate on the portuguese economy and economic policy in portugal. only a reallocation of resources within the economy based on expanding the tradable sector will avoid prolonged relative impoverishment. growth potential driven by exports is very high and the strong performance of exports makes the point. we must demand from the state that it promotes the institutional and macroeconomic conditions that attract high - quality investment and skilled labour. simplicity and stability in the tax system, effectiveness of the justice system and competition policy, efficient labour market institutions and financial stability – understood as sustainable public finances and a solid and competitive banking system – are critical success factors. bis central bankers ’ speeches but, the challenge of inclusive and sustained growth will only be accomplished if the private sector becomes the real driver of structural change in the economy. to borrow from the famous quote of president john f