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29 May 2012

WSJ: Portuguese central bank warns on deposits

Portugal's central bank said the country's residents are increasing deposits, which is making up for withdrawals by non-residents. BoP added that eurozone instability could prompt more non-residents, mainly institutional investors, to pull money out of the country, sapping banks of liquidity.

"The persistence of doubts regarding the capacity to resolve the sovereign debt crisis in the euro area, and in particular the possible intensification of contagion to other countries, may translate into a reinforcement of capital outflows associated with non-resident deposits", the central bank said in its semi-annual Financial Stability Report.

Economists and some politicians have expressed concern that banks will have to cut lending to reach the target ratio, especially after the central bank took steps to limit interest rates that banks offer to depositors. That could deprive companies, especially smaller enterprises, of credit.

Investors are closely watching the deposit movements of eurozone banks, particularly after customers withdrew more than €700 million from Greek lenders in a single day this month, over fears the country will leave the common currency area.

"The adjustment process of the Portuguese economy should continue to imply a slowdown in economic activity in 2012 and consequent rise in unemployment and the number of bankruptcies", the Portuguese report said. "It is, therefore, expected that we will see defaults, suggesting banks must increase impairments they take."

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© Wall Street Journal

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