Portugal Won’t Seek More Room for Deficit Goal: Interview

Prime Minister Pedro Passos Coelho
Prime Minister Pedro Passos Coelho said in an interview Portugal will “absolutely not” alter the deficit goals it pledged in return for a European Union-led aid package last year. Photographer: Mario Proenca/Bloomberg

The following are comments made by Portuguese Prime Minister Pedro Passos Coelho in an interview in Lisbon today:

On how Portugal’s image has changed over the last European Union summits:

“The first time I went to the European Council everyone looked at Portugal with some fear that the country could not reach the target of the adjustment program. But a few months later there was more confidence in the country because the government showed to all partners, European partners, its commitment to reach the targets. We have presented a tough new budget for 2012, we started structural reforms in Portugal and the main objectives in the program are being obtained.”

On European leaders recognizing Portugal’s efforts in achieving the goals of its adjustment program:

“All the colleagues recognized, are recognizing, the efforts of the Portuguese government.”

On Portugal turning the corner on the current crisis:

“Portugal is in a very difficult situation. Of course things don’t change from one day to another. We had external imbalances during the last 10 years. We are now reducing the external imbalances. Last year we could reduce 4.5 points of GDP in external imbalances. But of course we are not able to do everything in a year. The point is: it’s important to maintain our commitments and it’s important also to deliver the results. I’m sure in a few months when the results of the current year are stronger in the eyes of the analysts Portugal will become a more favorable case of success.”

On the need to strengthen European firewalls:

“Everyone thinks like that. We need stronger fire power against instability. Financial instability. And Angela Merkel knows it, of course. She’s waiting for an agreement in parliament to obtain the green light for that change.”

On EU finance ministers agreeing on a bigger EU firewall by the end of the month:

“The ministers of finance have said that until the end of March we will have an answer. A positive answer, I’m sure.”

On the increase in Portuguese bond yields:

“In first place, we must see that the secondary market is a very illiquid market. There are very few transactions, so the meaning of the financial stress is not so worrying as it would be if we were in the market, which we are not. So I think there is still some pressure on the markets because people don’t know if Portugal is able to grow in the coming years. Analysts think that Portugal is doing all the things right under the adjustment program, but the question is whether Portugal will be able to pay all its debt in the future.”

On reports that Portugal’s debt is unsustainable:

“I don’t agree. I don’t agree. Why? Because in the first place we have the IMF analysis on the sustainability of Portuguese debt and the IMF is saying that Portuguese debt is sustainable. What does this mean? It means that when you compare our debt, external debt, public debt and the Irish debt for instance, they have the same pattern. We expect the Portuguese economy to grow in 2013. At what rate? Probably between 0.7 percent and 1 percent. That puts Portugal on track to recovery - - economic recovery and growth. So the important thing is taking advantage of this period to implement structural change that could increase the potential growth of the economy.”

On the possibility of Portugal imposing losses on private bondholders in the future:

“Well, I can say is that the Portuguese government is getting all the positive results to avoid such a scenario. I don’t see any kind of possibility that my government could in a few years ask to restructure the Portuguese debt.”

On the Greek situation being unique:

“All the conclusions of the European Council point to that. The Greek economy, the Greek case, is unique in the European Union. There is a second possibility for the Greeks to arrange a different future, with a sustainable debt. That will depend on the structural reforms that the new government could implement after the elections.”

On whether Portugal can return to bond markets in 2013:

“That’s the objective. I’m doing everything to get this result. It’s important for Portugal to return to markets next year. Now we have a good implementation of the program. If we present at the end of this year consistent results on internal deficit and on the external current account, I think we will have a very good argument to persuade analysts and markets that we are on the way to returning to the markets.”

On Portugal not being able to return to bond markets next year:

“Well, the IMF, the European Commission and the European Central Bank have all said that if Ireland or Portugal faced difficulties on their return to markets because of external reasons they will maintain their support to both economies. That means that European countries and the IMF believe in the program of the two countries. They believe we will reach the targets on fiscal consolidation and on external account imbalances. But if something happens out there that creates difficulties on the return to markets then they can extend the programs to Portugal and Ireland. I don’t want a scenario like that and I hope that external reasons don’t arise.”

On whether there is preparatory work being done in case Portugal cannot return to bond markets:

“Not yet because we have one and half years ahead of us to prepare until September of 2013 for our return to markets. I think, as I told you in the last minutes, that until the end of this year it will be very clear that Portugal is on track and perfectly able to return to the markets.”

On Portugal reaching its 4.5 percent budget deficit target this year:

“Of course. Of course.”

On whether Portugal could follow Spain in terms of easing its budget-deficit target for this year:

“Absolutely not. Spain is in a different situation. They have more space for maneuver to get to the target in 2013. We are in an adjustment program. So we cannot fail the targets. The scrutiny about the Portuguese economy is total. We cannot slip on the budget and we cannot be flexible on the targets on structural change. The future depends on the determination of the government to reach these targets.”

On whether Portuguese banks are choking the economy out of credit due to higher capital ratio requirements:

“It’s true we need to de-leverage the Portuguese economy. It’s indispensable to create a more healthy and competitive economy. The problem is, can we be sure that the good enterprises don’t fall out because they didn’t have the money to have a good performance. Well, the new monetary policy conducted by the ECB grants more stable lending and financing to the economy.”

On structural reforms having an impact on economic growth:

“Well, you know. Structural change needs some time to bring about a positive impact on the economy. We know that. At minimum, three or five years. But if the market sees consistency and coherence on these kinds of reforms, it could anticipate some of the positive effects. So we are expecting in the next year -- 2013, 2014 -- good results in the short and medium term.”

On whether he sees a more cohesive Europe five years from now:

“I think so. A stronger union in the future. We have already new mechanisms and better treaties to get stability, coordination, surveillance. So the first step to complete the economic and monetary union is already achieved. Now we can think of a new level of deepening political union.”

On euro bonds:

“If we are able to think about a European government, a European treasury, a Ministry of Treasury in Europe. Why not? It’s possible and it’s perfectly attainable in the next 10 to 15 years. Why not?”

On Portugal pushing for lower interest rates on its bailout loans similar to Greece:

“No, it’s a different situation. Portuguese loans already have a very good interest level.”

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