Thursday, February 24, 2011

Need for Portuguese Bailout Not Justified by Numbers

By Grant de Graf

Portugal has raised €4.75 billion ($6.5 billion) via bond sales so far this year. But it now faces redemptions totaling €3.848 billion in maturing Treasury bills in March, according to data from Portugal's Treasury and Government Debt Agency. It then has €4.342 billion in bond redemptions in April, followed by €4.933 billion to be paid out in June. According to simple arithmetic, that leaves Portugal with about €8 billion short.

This deficit is nowhere near the shortfalls that were endemic to the Greek and Irish bailouts, even based on percentages. True, Portugal is a smaller economy and some will argue that this may well be the straw that breaks the camel's back. Most certainly, Portugal could always turn to the European Central Bank to avail it of a credit line, or raise the shortfall through a bond auction. The most probable outcome is that both alternatives will be pursued, even if it is structured in a way less conspicuous to the market.

Pundits are predicting a collapse of the country, given the "punitive" interest rates that Portugal will need to pay. In the bigger scheme of things, taking a long term view, those interest rates may actually be quite low. Ultimately, Portugal and the ECB will need to structure a blueprint that will work for Europe in its entirety. The need to resolve short term imbalances is important, but hardly of game changing significance in the bigger scheme of things. One thing is for sure. Nothing is certain.

Irish Bailout May Unleash Vigilantes on Portugal: Euro Credit

November 19, 2010, 8:36 AM EST

By Matthew Brown

Nov. 19 (Bloomberg) -- A resolution of the Irish debt crisis may shift the burden of speculation to Portugal.

While officials such as European Central Bank Vice President Vitor Constancio predict a bailout of Ireland will reduce financial pressures in the euro region, analysts from Citigroup Inc. and Nomura International Plc say any relief would be short-lived as investors turn their focus to the next-weakest peripheral nation.

The markets indicate that country is Portugal with 10-year bond yields of 6.88 percent, compared with 8.26 percent in Ireland and 11.62 percent in Greece, which received rescue funds in May from the European Union and International Monetary Fund. Portuguese Finance Minister Fernando Teixeira dos Santos said Nov. 15 that while “there is a risk of contagion,” that doesn’t mean the country will seek financial aid.

“Portugal isn’t in the situation that it is now because of Ireland,” said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. “If Ireland reaches an agreement to tap the European Financial Stability Facility or some other mechanism to support its banking sector, I don’t think that will alleviate the pressure on Portugal.”

The government has forecast that economic growth in Portugal will slow to 0.2 percent in 2011 from an estimated 1.3 percent this year. Portugal has made less progress at taming its deficit than some of the other peripheral nations. In the first nine months, the central government’s deficit rose 2.3 percent from a year earlier. That compared with a decline of more than 40 percent in Spain and more than 30 percent in Greece.

Record Yields

While Portugal has no plans to sell more bonds this year, so-called market vigilantes drove up yields on its debt during the past month amid doubts about the country’s efforts to reduce the budget deficit. The 10-year yield reached a euro-era record of 7.25 percent on Nov. 11, 484 basis points higher than benchmark German bunds of similar maturity.

Portuguese 10-year yields are little changed this week, while Irish yields fell 10 basis points. The spread between the 10-year Portuguese bonds and German bunds rose 6 basis points today to 410.

Investors who push up yields to alter government policy are known as vigilantes, a term coined in 1984 by economist Edward Yardeni, president of Yardeni Investments Inc. in New York. They were credited with forcing Bill Clinton to cut the U.S. deficit after he came into office in 1993, helping drive 10-year Treasury yields down to about 4 percent by November 1998 from above 8 percent in 1994.

While Irish and Portuguese bonds probably would rise with a bailout agreement for Ireland, any gains wouldn’t change the underlying problems for peripheral Europe, according to Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank.

Greece Than Ireland

“Wait a few weeks and the markets will just go for someone else, with Portugal at the front of the queue,” London-based Diebel said. “The vigilantes pushed Ireland into the same situation Greece is in. Why would you conclude they won’t do the same to Portugal?”

Ireland’s debt crisis was triggered by the rising cost of bailing out the nation’s banks, including Anglo Irish Bank Corp. and Allied Irish Banks Plc. While Portugal doesn’t face a crisis in its financial industry, it has a larger debt burden and the country has almost 10 billion euros of debt that comes due during the first half of 2011, data compiled by Bloomberg show.

Teixeira dos Santos, the finance minister, said in parliament two days ago that Portugal wants to continue financing itself in the markets.

‘Significantly at Risk’

“Portugal needs more cash than Ireland does because they go to the market on a regular basis,” said Nick Firoozye, head of interest-rate strategy at Nomura in London. “The market may move onto Portugal at some point because it’s significantly at risk.”

While Ireland started to reduce spending in 2008, Portugal has been slower to address its fiscal deficit, the fourth- largest in the euro region, and the government failed to reach an agreement with its biggest opposition party on the 2011 budget plan until the end of last month.

Portugal has proposed to lower its total wage bill for public workers by 5 percent, freeze hiring and raise the so- called value-added tax by 2 percentage points to 23 percent.

The government is counting on exports such as paper and wood products to support expansion. Portugal’s economy unexpectedly grew 0.4 percent in the third quarter from the previous three months, beating economists’ estimates for a contraction, as exports rose and imports grew at a slower pace.

Still, the Organization for Economic Cooperation and Development yesterday forecast the economy will swing to a contraction of 0.2 percent next year.

“Their view on fiscal consolidation is still premised on an excessively-optimistic growth projection,” Citigroup’s Mansell said. “Portugal is hugely reliant on the fortunes of its neighbors and it takes a huge stretch of the imagination to see growth remaining buoyant.”

--With assistance from Joao Lima in Lisbon. Editors: Tim Quinson, Andrew Davis

Portugal's Debt

FRANKFURT—Some European officials are quietly discussing contingencies for what might be a Portuguese request for financial aid as early as next month, when the highly indebted country begins facing large-scale debt redemptions.

Financial pressure on the country's treasury is increasing, a topic that is likely to come up at the March 11 and March 24 meetings of European Union leaders, according to people familiar with the discussions.

"The feeling is that it can't go without a bailout beyond March or April at the latest and is already under pressure by countries like Germany to ask for help, to get it so the situation in the euro zone becomes more clear," a senior euro-zone government official said. Some Portuguese officials are privately considering the possibility, this official said.

Portugal has raised €4.75 billion ($6.5 billion) via bond sales so far this year. But it now faces redemptions totaling €3.848 billion in maturing Treasury bills in March, according to data from Portugal's Treasury and Government Debt Agency. It then has €4.342 billion in bond redemptions in April, followed by €4.933 billion to be paid out in June.

That borrowing volume will come at a stiff price. Ten-year Portuguese yields Tuesday were hovering near multiyear highs of 7.344%, well above the 7% level at which debt-servicing costs are deemed unsustainable.

The Portuguese debt agency skipped a time window for a bond auction this week, probably because of high costs. At these levels, Portugal is paying a painful 4.18 percentage points more than the German government on equivalent 10-year bonds.

Another senior European official said many around the EU consider it only a matter of time before Portugal asks for a bailout package similar to the deals struck with Greece and Ireland last year.

Portugal's already detailed reform plans mean much of the work needed to put a package together has already been done. That means the European Commission—the EU's executive arm—could move quickly once a request comes in, the official said.

Athanasios Orphanides, a member of the European Central Bank's governing council, said in an interview over the weekend that Portugal's case is "particularly urgent." He warned that failure at next month's summits to come up with convincing changes to fiscal policy and competitiveness in the bloc could destabilize the 17-country euro zone.

Officially, the Portuguese government remains resolute in declining the need for outside help to extricate the country from its fiscal straits.

That could be at least in part due to national politics. Portugal's largest opposition party, the center-right Social Democrats, has raised the possibility it could put forward a censure motion against Prime Minister José Socrates' minority government.

But market watchers are betting otherwise, believing that Portugal is approaching the end game in its struggle with fiscal deficits.

"They will seek help," said Jan von Gerich, a senior analyst at Nordea in Helsinki, adding that the timing is the more uncertain factor than whether or not the country will ask for assistance.

"I don't think they can manage unless the March summits come up with another idea," he said, adding that he expects a decision on Portugal's bailout before its April bond redemption.

—Laurence Norman in Brussels contributed to this article