Portugal likely to hold out for better rescue deal
Portugal may not be able to avoid seeking an international bailout, but it can afford to wait until an EU summit in late March, or longer, in the hope that Europe will offer a more generous rescue scheme to indebted states.
February 19, 2011 / 10:27 IST
Portugal may not be able to avoid seeking an international bailout, but it can afford to wait until an EU summit in late March, or longer, in the hope that Europe will offer a more generous rescue scheme to indebted states.
Economists and bond analysts have little doubt that rising bond yields will eventually force Portugal to seek financial aid, as did Greece and Ireland. But Lisbon has resisted pressure to do so for months, and might well hold out until June."It's really a matter of funding. What they've raised so far this year should be enough to cover their April bond redemption, and there are no objective reasons to seek a bailout before then," said Ioannis Sokos, debt strategist at BNP Paribas.Portugal has around 4.3 billion euros in bonds coming due on April 15. The only other bond due this year is in June, when the country will have to repay around 4.9 billion euros. It has already issued just under 6 billion euros in bonds this year.Investor worries ahead of these redemptions could drive bond yields to prohibitive levels -- a concern that the IGCP debt agency tried to counter this week by buying a small amount of bonds back early. A euro zone source told Reuters on Thursday that European Union member states were increasingly concerned about Portugal's ability to fund itself in financial markets, and believed Lisbon would need to seek a bailout by April. Germany, France and other euro zone countries have been urging Portugal to seriously consider taking a bailout to avoid instability that could hurt the wider region, political sources said. But balanced against the external pressure for a bailout is the domestic political controversy that the Portuguese government would face if it sought aid, which would come with fiscal and policy conditions."They've already resisted longer than we expected and I suppose it makes sense for them to wait now until there's more clarity about the European anti-crisis policy," said Silvio Peruzzo, an economist at Royal Bank of Scotland in London.
Summit
European Union leaders will hold a summit on March 24-25 to finalise a "comprehensive package" of policies to tackle the euro zone's debt crisis.Among other things, the summit is expected to raise the effective lending capacity of the European Financial Stability Facility, the 440 billion euro bailout fund agreed last May, and give it more flexibility on how to use its money -- for example, it may be allowed to buy the bonds of indebted countries from the primary or secondary markets, or fund countries' buybacks of their own bonds. "I imagine Portugal wants to wait for a more flexible EFSF. They'll wait and see what the policy response will be. If it's true that the EFSF will be made more flexible, it will be advisable for Portugal to tap it at some point," Peruzzo said.Analysts think one possible measure in the EU's package that could persuade Portugal to take a bailout would be an offer of a flexible credit line with conditions, instead of a full-scale bailout that would imply intervention by the European Union, the International Monetary Fund and the European Central Bank.The government has been adamant in refusing to ask for a full-fledged bailout and has been calling for a "European" solution to the crisis, insisting it is doing its part by reducing its budget deficit as agreed with Brussels.A credit line might be a face-saving solution for the minority Socialist government. The involvement of the IMF would be particularly embarrassing for the government, and might cause it to fall, because of bad memories among the public of IMF-ordered austerity in the 1980s."In our view, the current domestic political configuration in Portugal probably is not conducive to the implementation of an IMF/EU rescue package in its current form," Deutsche Bank economist Gilles Moec said in a research note.He said the solution for Portugal might lie in an expansion of the EFSF and a reduction in the interest rates which the facility charges for rescue loans -- another possible step that the EU has been considering for its crisis package."The Portuguese government may well present this as a "semi-victory" by showing that its decision to hold out longer than the other two countries allowed them (Portugal) to negotiate more favourable conditions," Moec said.
Inevitable
Analysts are practically unanimous that a bailout is a reality which Portugal will have to face in the end."The specific date on when they seek the bailout is a detail that boils down to when the cost of funding will become too prohibitive," Peruzzo said. "They can resist for quite a while, but at some point will probably be forced into the mechanism."IHS Global Insight economist Diego Iscaro said current bond yields, above 7.0 percent on five-year government bonds, were very high and unlikely to retreat."I can't really see them going significantly lower in the near future, considering the economy. So, given the high rates they have to pay, I expect it (the bailout) to happen...It's difficult to get the time right. Initially, I thought before March. Then I thought perhaps in June."But despite the rise in bond yields, which is partly due to climbing inflation, the markets are not showing a dramatic increase in alarm about Portugal. The premium which investors demand to hold Portuguese 10-year bonds rather than German Bunds was 427 basis points on Friday, some way below its euro-era high of 480 bps hit last November.BNP's Sokos said Portugal could withstand "some issuance at a very high rate" for some more time, being more resilient than Greece and Ireland, whose overall debt loads were larger and more expensive to service. Portugal's situation is more benign and presents no real default risks, he said."Portugal's debt servicing cost is closer to 4%, while it's around 5% in Greece, and somewhere in the middle for Ireland."Portugal's IGCP debt agency said last month that issuing all bonds at 7% and rolling over all Treasury bills at 4% until 2013 would only lift its total debt servicing cost to below 5% in 2013 from 3.5% at the end of 2010. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
