Portugal exits its international bailout program tomorrow, regaining the economic sovereignty the nation lost after the European debt crisis erupted while facing enduring challenges to its finances.
The Iberian country’s 214 billion euros ($293 billion) of debt is the third highest in the euro region as a percentage of gross domestic product. The economy is about 4 percent smaller than in 2010, a year before the government had to ask for an international rescue. Borrowing costs based on 10-year (GSPT10YR) bond yields are almost twice those of France and all three major ratings companies consider the country non-investment grade.
“There will now be two or three decades of lean times for the state, which will have to purge that debt burden,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 87 million euros in assets including Portuguese government debt. “The debt burden is sustainable, but it’s heavy.”
Portugal decided to mimic Ireland in exiting the bailout without the safety of a precautionary credit line after last month auctioning bonds for the first time since requesting the 78 billion-euro rescue package. While the country has emerged from its longest recession in at least 25 years, Prime Minister Pedro Passos Coelho’s government must trim spending this year and next to meet deficit targets.
“I hope that everyone has learned that it’s not by following a path of squandering, spending what we don’t have and doing everything that is contrary to the sustainability of the economy that we can improve the wellbeing of the Portuguese,” Luis Marques Guedes, Portugal’s minister for parliamentary affairs, said yesterday.
Portugal, which had last received external help from the International Monetary Fund in 1983, had been trying to avoid requesting aid again. European Union and then euro membership had allowed Portugal to gorge on cheaper financing.
With the country’s budget deficit at 9.8 percent of gross domestic product in 2010, the country ended up seeking money a year later as investors turned against European debt after Greece revealed an unexpectedly big hole in its finances.
Former Finance Minister Fernando Teixeira dos Santos said the government at the time had no choice because the interest rates Portugal was being asked to pay had become unsustainable. His successor following elections, Vitor Gaspar, said “Portugal’s imbalances were exposed.” There had been a “bust without a boom,” he said.
With the bailout, Portugal sold assets, raised taxes on everything from wages to diesel cars and reduced budget spending by 12 billion euros since 2010. The austerity measures caused a rift in the government coalition after then-Secretary of State for Treasury Maria Luis Albuquerque was named finance minister to replace Gaspar, who quit on July 1.
It started to pay off. The Bank of Portugal said in a March 26 presentation that Portugal in 2013 recorded the first surplus in the balance of trade of goods and services since 1943. The central bank also said that exports will represent 45 percent of GDP (PTGDPQOQ) in 2016, up from 32 percent in 2008.
“Everyone in Portugal understands how important fiscal discipline is,” Bruno Macaes, Portugal’s secretary of state for European affairs, said in an April 2 interview. “We don’t want to go through the same again. So I’m optimistic that this can be sustained in the future. It’s not a temporary adjustment.”
The government said on Jan. 9 it raised 8.1 billion euros from asset sales, more than the proceeds of about 5 billion euros projected in the bailout program.
Last year it sold shares in postal service CTT-Correios de Portugal SA in the country’s first initial public offering since 2008, and also sold airport operator ANA-Aeroportos de Portugal SA. Earlier it sold stakes in utility EDP-Energias de Portugal SA and in REN-Redes Energeticas Nacionais SA, Portugal’s power and natural gas grid operator.
The country’s borrowing costs dropped since the beginning of 2012, helped by signs of economic recovery and a market rally spurred by European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to defend the euro.
Portugal’s 10-year bond yields fell to as low as 3.44 percent on May 9, the least since 2006, after reaching more than 18 percent in January 2012. While they remain higher than other euro members -- Ireland, Spain and Italy all pay between 2.69 percent to 3.06 percent, while French 10-year bonds yield 1.8 percent -- the drop in yields allowed Portugal to opt against seeking a precautionary line of credit.
The country also built up a cash buffer before the end of the aid program and debt agency IGCP said in an April 2 presentation that it ended 2013 with what it calls a treasury cash position of 15.3 billion euros.
“Portugal was able to accomplish the best possible exit,” Vice Premier Paulo Portas said on May 8. “The Portuguese state will stop having the obligation to negotiate its laws line by line with the creditors.”
The country still has its troubles. The economy shrank 1.4 percent last year, the most in the euro region aside from Greece and Cyprus, the European Commission said this month. The jobless rate is at 15.1 percent. The government forecasts the economy will now grow 1.2 percent in 2014 and 1.5 percent in 2015.
GDP contracted for the first time in a year in the three months through March as exports dropped. It fell 0.7 percent from the fourth quarter. Economists had predicted a rise of 0.1 percent, according to a Bloomberg survey.
Last week, Portugal’s government bond rating was raised to Ba2 from Ba3 by Moody’s Investors Service, which cited faster-than-projected improvement in fiscal health. Yet it left Portugal at a junk rating, four months after lifting Ireland out of the non-investment grade category.
The government targets a budget deficit of 4 percent of GDP in 2014 and forecasts the shortfall will drop below the EU’s 3 percent limit in 2015. The deficit narrowed to 4.9 percent in 2013, when debt reached 129 percent of GDP.
Prime Minister Coelho will convene his cabinet tomorrow at 9:30 a.m. local time to mark the end of the aid program, though it expects the final disbursement from the package in June.
“We are on the right path to never again allow Portugal to go through another collapse, another rescue, another national emergency,” Coelho said in a televised address on May 4, flanked by his ministers. “May 17, 2014, will stay in our history as a day of paying tribute to all the Portuguese, because without their effort it wouldn’t have been possible.”
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