Home' Trinidad and Tobago Guardian : August 3rd 2014 Contents AUGUST 3 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
INTERNATIONAL | SBG21
For nearly a decade Spain has resisted
the received wisdom, and European
regulations, on accounting. In 2005
the European Union required all of its
members to adopt IFRS, the dominant
accounting standard outside the United
States. One of the biggest changes between the new
rules and many of the national guidelines that had
preceded them was a ban on banks writing down
the value of their loans in anticipation of future losses,
a practice that some had abused to disguise volatility
in their earnings. Instead IFRS imposed a strict
"incurred-loss" method, in which debt was valued
at par until a borrower actually stopped paying.
While nodding at the new rules, Spain in practice
has retained its old ones. Its banks, more than those
of any other European country, had tended to wait
until the last possible moment to recognise bad loans,
amplifying the ups and downs of the credit cycle.
Its central bank therefore was keen on the sort of
smoothing of losses that IFRS. was trying to eliminate:
In 2000 it had forced banks to adopt "dynamic pro-
visioning," making bigger writedowns in boom times
and smaller ones in bad.
The financial crisis tested both systems and revealed
flaws in each. Because banks elsewhere in Europe
could not write down their loans based on the dete-
riorating economic environment, their quarterly results
failed to reflect the full horror to come, to investors
cost. By contrast, Spanish banks had been forced to
make extra provisions during the good years and so
weathered the collapse of Lehman Brothers relatively
well. In 2009 Britain s Financial Services Authority
recommended changing IFRS to follow Spain s lead.
However, the provisions required under the Spanish
system were based on historical averages, in effect
assuming that all downturns would be of a similar
scale. When the euro crisis dealt Spain a second blow
in 2010, the banks buffers had already been depleted.
Many went bust.
With these lessons in mind, the International
Accounting Standards Board, which oversees IFRS,
issued revised rules this week. It has replaced the
incurred-loss method with an "expected loss"
approach similar to Spain s.
Rather than adjusting loan-loss provisions by a
fixed proportion on the basis of past economic cycles,
however, the new standard lets the banks determine
how much to write off. They will take an immediate
charge when making a loan for any losses they forecast
during the coming year. If the odds of repayment
subsequently fall substantially, the lender must register
a new writedown for the probable losses during the
loan s entire lifetime. The new system is scheduled
to take effect in 2018, and the American counterpart
to the IASB is working on a similar rule.
In the short term, affected banks will focus on set-
ting up computer systems to generate the necessary
loss estimates and on determining how the change
will affect their compliance with financial regulation.
According to a recent survey by Deloitte, a big
accounting firm, the new method is expected to
increase loan-loss provisions by around half. That
could force some banks, already struggling to comply
with the stricter capital requirements imposed since
the crisis, to raise even more money.
In the long run, though, banks may try to twist
the system to their benefit. The new standard does
require them to back up their accounting choices
with much more evidence than the pre-IFRS rules
Nonetheless, it still gives them broad leeway to
decide when a loan is looking dubious enough to
register an expected loss. Predicting the magnitude
of losses also is a subjective matter.
Since the crisis regulators generally have given
bankers less discretion to interpret the rules, not
@2014 The Economist Newspaper Ltd. Distrib-
uted by the New York Times Syndicate
For banks, the
freedom to fudge
and are demanding justice.
"It s shocking now" said Antonio Barroso,
an analyst with Teneo Intelligence, a political
and business risk consulting firm in London,
"but when you look back it makes sense."
The sometimes close connections in south-
ern Europe among banks, politicians and
public institutions discourage transparency;
a feature exposed by the recent crisis, Barroso
The storm broke in May when an audit
found "serious" accounting irregularities at
Luxembourg-based Espirito Santo Interna-
tional SA, one of the holding companies
through which the Espirito Santo family
owns its assets, including a stake in the
bank. Salgado blamed the company account-
ant. But media reports began documenting
financial shortfalls at another two holding
companies, which then conceded they also
were unable to pay money they owed. All
three are now insolvent, which could result
in a fire sale of the assets they hold, wiping
out the family s riches.
The Espirito Santo family s financial busi-
ness began in 19th-century Lisbon. Portugal
was neutral in World War II, and the Espirito
Santo s bank offered a harbor for European
private fortunes. The Espirito Santos were
close advisers to Antonio Salazar, who ran
Portugal as a dictatorship for four decades
from the 1930s. After a 1974 army coup
toppled the dictatorship and brought a left-
wing backlash, the bank s board was jailed
for three months for being prominent cap-
italists. Following their release without
charge, the executives fled through neigh-
boring Spain and set about rebuilding their
wealth abroad. After Portugal joined what
is now the European Union in 1986, the
government handed back to the Espirito
Santo family the bank and insurance com-
pany nationalised after the coup.
Ricardo Espírito Santo Silva, 70, the great-
grandson of the founder, got the bank s top
job in 1992. He cultivated an air of somber
elegance and distinction.
He valued discretion and behind-the-
His powerful position at the head of the
country s biggest bank gave him political
influence: he was consulted by Portuguese
presidents and prime ministers; he provided
loans for public works that won votes; and
he gave retired politicians jobs as consultants.
Senior bank executives have sat in Por-
In financial circles, Salgado was known
by the acronym DDT: "Dono Disto Tudo,"
which roughly translates as "Owner of all
he surveys." He has long been regarded as
one of Portugal s most powerful men.
Suddenly, he is an isolated figure. Cabinet
minister Luis Marques Guedes said last week
"it is always good when the law functions
The full scale of the Espirito Santo Group s
financial problems will likely take some time
Regulators say Banco Espirito Santo
account holders won t lose their money,
though investors---including Banco Espirito
Santo---who lent money to other businesses
controlled by the family may not get all theirs
back. Bank of Portugal governor Carlos Costa,
who has admitted embarrassment at trusting
the numbers Salgado gave him, says the gov-
ernment has 6.4 billion euros available to
recapitalise the bank if necessary. Costa told
lawmakers that private investors are ready
to step in but he did not identify them.
The central bank, the Lisbon stock
exchange and Portugal s attorney general
are all investigating how Salgado juggled
money between the various family businesses
and whether he misled regulators and
investors. Authorities are also reportedly
checking Espirito Santo assets in the United
States, Luxembourg, Switzerland and Pana-
ma. Angolan officials say they have identified
"irregular operations and bad debts" at
Banco Espirito Santo Angola.
While Salgado could face prison time,
hundreds of other family members who
have long lived off the company s success
may lose everything; including the family s
good name. AP
'Irregular operations and bad debts'
In this Tuesday, July 29 photo, a man walks next to books titled, "The Last Banker," about former Portuguese bank Banco Espirito Santo's
chief executive Ricardo Salgado, in a bookshop in Lisbon. The Espirito Santo family business survived wars, dictatorship, revolution and
family feuds for almost 150 years. Now, one of Europe's last banking dynasties is being stripped of its wealth and influence amid
accounting irregularities, huge unreported debts, and a police investigation. AP
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