Portugal Needs ECB Action to Avoid Greek Fate, De Grauwe Says
Portugal will follow Greece into debt restructuring unless the European Central Bank steps up purchases of its distressed bonds, said Paul De Grauwe, a professor at the Catholic University of Leuven in Belgium.
“The Portuguese problem is a problem of panic and fear and you have to stop it,” De Grauwe said in an interview in Oslo. “The only one who can do it is the ECB.”
Portuguese 10-year yields closed at a euro-era record of 17.393 percent at the start of this week amid concern a Greek debt writedown being negotiated with investors may lead to a similar deal for the government in Lisbon. Prime Minister Pedro Passos Coelho reassured investors on Jan. 30 that there was no risk of investors being asked to take losses on Portuguese debt.
Greek bondholders are being pushed to cede more ground after agreeing in October to take a 50 percent cut in the face value of more than 200 billion euros ($263 billion) of debt. The Greek bond-swap talks with private creditors are “ultra- difficult,” Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said yesterday.
“If you let it go like this, then, with 100 percent certainty, Portugal is going into bankruptcy,” De Grauwe said. “You repeat the Greek situation. Of course fundamentally Portugal is in a much better shape than Greece but sometimes the market can drive you into insolvency in a self-fulfilling way.”
De Grauwe said policy makers should buy more government debt rather than relying indirectly on banks. The ECB in December helped ease tension by providing banks with 489 billion euros ($645 billion) in three-year cash.
The Fireman
“I’m happy they did it indirectly through the banks because not doing so would have been a disaster but it would have been more effective if they would have done it directly,” he said. “The ECB is the fireman, they have been able to extinguish part of the fire, the Spanish and Italian, but now the Portuguese fire is starting all over and could spread.”
The ECB has also bought about 219 billion euros ($289 billion) in European bonds through its Securities Market Program, including every week since August. The ECB bought Portuguese bonds on Jan. 30 as 10-year borrowing costs climbed, said three people with knowledge of the transactions, who declined to be identified because the trades are private.
Portugal, which last year became the third euro-area country to get a bailout from the EU and the IMF, plans to return to markets in 2013. If external factors stop the country from doing so, Coelho said both the IMF and the EU will continue to “support our program.”
Yields Fall
Yields on 10-year securities tumbled more than 2 percentage points to about 14.9 percent yesterday.
Portugal doesn’t present the risk of default that Greece does to the rest of the European Union because officials there are seeking to contain the nation’s financial crisis, Fitch Ratings said on Feb. 1. Fitch, Moody’s Investors Service and Standard & Poor’s have downgraded Portugal’s credit rating to junk grade. The International Monetary Fund estimates Portugal’s gross domestic product to contract 3 percent in 2012.
“With the program that the new government in Portugal has set up they can solve” their problems, De Grauwe said. “Why the markets don’t trust the Portuguese government; why they trust the Spanish government is a puzzle to me. The Spanish banking sector is not in better shape. It is in a worse shape than the Portuguese banking system.”
To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net
To contact the editor responsible for this story Jonas Bergman in Oslo at jbergman@bloomberg.net
Rate this Page