CNBC Transcript: Interview with Mario Centeno, Portuguese Finance Minister

Following are excerpts from a CNBC interview with Julia Chatterley and Mario Centeno, Portuguese Finance Minister.

JC: So thank you so much for speaking to us and coming to us right here at the IMF warned of course concerned about the Portuguese banks I know the prime minister has mentioned potentially a bad bank. Is that what you're looking at?

MC: Well thank you for having me here again. We are looking very carefully and to the banking sector. We know that there is something that we need to do to stabilize then the banking system is very important for the Portuguese economy. This government is ever ready to tackle a few events in the banking sector. What we are looking at is to a solution that may reduce NPLs in the banking sector. We are doing that of course in the context of the current regulations. We mean something that other countries in Europe are also tackling and this is the context so yes we want to stabilize, to work towards the stabilization of the banking sector and that is the framework that we are facing.

JC: Is there still a risk that taxpayers money is used?

MC: Well this is not that this is not in the baseline so what we are looking at is a solution the does not include using taxpayer money to do that, which again is something that is natural given the regulatory context that we live in Europe that it prevents that to be the case.

JC: I think investors are concerned given what happened with bankers British Santo and obviously Novo Bank as well that there is a risk of some further kind of bail in operating under the new rules in Europe is that a risk?

MC: All countries in Europe prepare to the new regulatory environment that is being fully implemented in the context of the BRRD since January 1st 2016, the new rules for bail-in are very clear and we think that right now and given the situation of the banking sector in Portugal we need to avoid that that and we need to work for this idea of stabilisation that that is actually being implemented, I mean in a case by case scenario, with a solution for BPI with the selling of Novo Banco the events you know it's their resolution authority that is responsible for the process but the what we are looking for it's a market solution in a competitive bidding process to raise capital to Novo bank

JC: You mentioned BPI there you are trying to find someone to buy a specific interest in BPI for a while and Caixa bank now has stepped up. Are you reliant for or relying on the Spanish banks for greater consolidation in the sector?

MC: Well it's just the market functioning so you know we are close neighbours with an increasing integration in terms of trade with Spain it's very interesting that the neighbouring regions between Portugal and Spain trade very heavily. Galicia for example is our ace trade partner competing with all major countries in the world the same thing happens in the region in the south. So it's this is simply the result of the market functioning and the interest that that the Portuguese economy may reveal in terms of how their investors namely Spanish ones.

JC: I saw a recent article in the Portuguese press suggesting that 30 percent of the banking sector is controlled in some way by Angolan interests. Can you just clarify and tell us what percent interest is Angola here just to clear up any confusion.

MC: Well it's - everybody knows because those are public banks and firms so they are, it's very transparent. There are specifics stakes of a couple of banks that have Angolan capital but that's, that's it, I mean I won't go along with this type of reasoning that…

JC: Concern?

MC: Exactly and concerns.

JC: But Angola has asked the IMF for help. There's now capital controls so does that concern you whether there is going to be some kind of knock on impact of the Portuguese banking sector?

MC: You know there is a strong, and again also in the last decade or so, of a strong increase in the economic relationship between Portugal and Angola. Many workers, many Portuguese workers working there, Portuguese foreigners also, investing there and this of course, economic problems in Angola are of concern for us, not only in the banking sector but the economy wide.

Of course in our in our exports Angola, although increasing during this period has also, has still a very small share of ours it represents, nowadays less than 3 percent of our exports, goods exports. But still it's always a problem when a partner and a dynamic partner faces these type of problems and the if you want to look at the financial sector given the volatility that is typical of that sector of course is this is, this is even more the case but again it's very important to look at the broad picture and to see our system as a whole make cope with this type of shocks that to be honest they pop up frequently in our economies.

JC: And it's manageable? The Angolan risk is manageable?

MC: It is manageable it is being in the recent past last couple of months is being managed. For example the BPI case and still is something that we need to look at it in this double perspective that it's a country it's a country that has an increasing importance for us, for our economy, for our firms and we need to be able also to cope with that in that perspective.

JC: The other thing we've been talking about endlessly it seems is the impact of negative rates on the banks. How concerned are your bank CEOs about the hit to profitability after negative rates?

MC: The figures are large and it's not only something that specific of Portugal. In Portugal we've been following that situation very closely. It is important to establish a confidence also in this sector among customers and in firms so that we can add in keeping this process of rewriting contracts every time we have we have a problem but it's also important to, to look at the way the banking sector can be profitable again and low interest rates are a big problem to that and the impact of these low and even negative interest rates in this, so far Portuguese banks, exist and you need to be taken very carefully and, and of course the risks need to be shared among the participants.

JC: To go back to how we started this conversation, this is precisely why you're looking at options to support the banks because they're dealing with the risks surrounding Angola, they've got the impact of negative rates, globally slow growth - all these things.

MC: Yes and again the crucial importance of the financial sector for the growth of the Portuguese economy as it happens in any modern economy.

JC: The Prime Minister and Alexis Tsipras in Greece signed a declaration against austerity recently. Who are they sending a message to?

MC: Well it's the issue of austerity in Portugal is very clearly stated by this Government and what we wanted to do is to, in a very cautious way, so that we know that fiscal consolidation is something that we have to concede there.

JC: Because you're still doing it in the budget.

MC: Exactly exactly. But we need to somehow reshuffle a bit what is the, what are the costs of these this austerity and to somehow put some easing of this austerity in fact, in the production factors of the economy, so that we move a little bit the fiscal burden away from direct taxation to indirect taxation, so that decisions of people in terms of production, in terms of the labour market and investment, those workers and firms, I'll say, are somehow eased. But we need to be very much focussed on this idea of fiscal consolidation on the one hand and a little bit of, a fiscal framework that is more friendly to growth.

JC: Mario Draghi recently suggested that there was no reason to roll back on some of the measures, whether it's the minimum wage, whether it's the public sector job cuts, whether it's the pension cuts. These are all things that you're doing. So how do you explain to Mario Draghi that he's got it wrong and actually these are things that you need to do here?

MC: Well the issues you mentioned, the minimum wage, the pensions and the civil servants, they have very different impacts , and the way we deal with those, was very different. Let me just briefly explain. For example, on pensions: what we did was to restate the law - the rule of law, if you want, that was prevailing in Portugal since 2007/2008 which was a very ambitious and very important reform under social security. And this was not precisely a reversion of anything. On civil servants, in the context of the discussions we had with the European Commission, we implemented the rule of rotation of civil servants that implies a reduction, a gradual reduction, a further reduction in the number of civil servants. So we did not revert to anything like on that subject. What we actually did was to accelerate a little bit the reversion on the wage cuts. But it's important to note that the wage scale in Portugal for civil servants is frozen since 2009 and these wage cuts were already prevailing since 2010 and the Constitutional Court considered them unconstitutional. So again, the rule of law had to prevail. But still this is something that we need to focus on, it's a very prolonged way of wage restraint and these wage cuts were only applied to workers making more than fifteen hundred euros. So it's not, I'll say again, something that changes the face of fiscal policy in Portugal. And the minimum wage, it's not really a structural policy. We need to get policies that look more to social cohesion and to promote the growth.

JC: So if I look at the spread between German debt and Portuguese debt it remains elevated, even after the ECB announced greater stimulus measures. So I do think there's a perception out there from investors that either they are concerned about, sort of, slowing growth in Portugal now, they're concerned that you're rolling back some of these measures or a perception that you're rolling back on some of the measures. Or they're concerned about the banking sector. What do you think it is? And do investors have it wrong here on Portugal?

MC: Well we want to reduce the risks and increase the confidence on the Portuguese economy - that's the way we face our economic policy. And of course we need to be very clear with them with this idea in mind. And well, the global economy has its own risks. Portugal is a small open economy. It faces, of course, in some cases, or in some years, the consequences of these shocks and of these risks in a magnified way and this is very clearly understood by the government and we are acting towards reassuring them of the main goals. For example, I can mention to you that the budget execution for the first quarter shows numbers that are clearly in the direction of reducing the fiscal deficit, the numbers we have are showing that very clearly, and so this is the way we have to be the communicating with them in the sense that we are working towards a framework, an economic policy framework, that is planning to grow.

JC: So growth is slowing though. As you said it's a combination of things. What are you going to do to boost growth?

MC: Right now what we have to do is to fulfill our commitments in the sense of the policy goals that we have. We are not going to... actually we haven't done that at all. To stabilize the reforms in the labour market to allow them time to make an effect. And, of course, we need to communicate then these goals of our policy and the best thing we can do is to show our own actions. And, for example, the discussion that we are having right now in Portugal on the capitalization of firms, and the large number of measures that we are going to put forward to that, we live in a very competitive world so we need to be able and available to do those types of policies.