ETV - Bad loans, ECB intervention and competitive advantages

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Post published in the Innovation Models Blog following the interview of Hugo Mendes Domingos in ETV's (Portuguese Economic TV) Closing Bell in August 8 2012 about the current increase bad credit loans by households in Portugal.

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ETV - Bad loans, ECB intervention and competitive advantages

  1. 1. Portuguese companies should not count on ECB intervention to solvethe problems caused by the excessive use of debt. The root causes of theincrease in bad loans are a lack of innovation and the absence ofcompetitive advantages. The only way to find the path of growth maywell be to focus on these drivers.Here are some facts about bad credit in Portugal: • 709 thousand individuals are currently facing difficulties with debt service, which corresponds to 15.6% of total – that’s roughly one in every six debtors • 8.7% of companies are facing delays in their debt service.Bad loans represent a small proportion of total credit in the economy. Inrelative terms, bad loans by households represent 3.8% of total, whilebad loans by companies reach 7.7% (a sharp increase since 2008). Thesenumbers do not express urgency in resolving the matter on thehousehold side. The level of bad loans at company level appears to be amore pressing issue.Looking at households in particular, we calculated two indices based ondata from the Bank of Portugal: non-performing loans by householdsand credit extended to households since June 2009.
  2. 2. Bad loans by households are increasing, as expected during an economiccrisis. This has not stopped banks to continue to extend credit tohouseholds during the same period, as the index shows.Possible solutionsNo-one should count on the European Central Bank to solve the baddebt problem all by itself. The notion that Portugal’s European partnerswill solve the country’s economic difficulties by injecting money into theeconomy could lead to disappointment and is in fact, dangerous.We believe that the answer lies elsewhere: Individuals can be influencedto use less debt but ultimately it comes down to personal responsibility.In the case of companies, the answer lies in good management practices.The turnaround at company level should come from a sense of purpose,to develop new paths and bet on innovative projects. The reality we see,however, is different. Companies rarely show an ability to developprojects that actually result in competitive advantages. Bad loans areone of the consequences of that inability to forge economic growth.Companies should use debt as an instrument to finance growth andfocus on innovative projects that are assessed and scrutinized by banks.This is a simple principle that would result in stronger companies and ahealthier financial system.
  3. 3. Hugo Mendes Domingos Comments on ETVs Closing Bell, August 8th2012 (in Portuguese):Youtube link -http://www.youtube.com/watch?v=4Tb74E2sglE&feature  

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