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All Portugal Wants for Christmas Is Equal Treatment: Euro Credit

Portugal's Prime Minister Coelho
Pedro Passos Coelho, Portugal's prime minister. Photographer: Mario Proenca/Bloomberg

After obeying calls for deficit-cutting, Portugal aims to win concessions from its creditors to help pave the way for a return to the bond markets in 2013.

Prime Minister Pedro Passos Coelho said Dec. 7 that he will fight for equal treatment on terms of Portugal’s bailout loans from the European Financial Stability Facility after Greece was granted longer maturities and a delay in interest payments. What he doesn’t want to do is follow Greece in asking for a second rescue package or writing down debt.

“Benefiting from reduced interest rates would be a significant relief,” said Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 55 million euros ($72 million) of assets and holds Portuguese government bonds. “The deficit is generated by the weight of debt and interest costs. Everything that would lighten the debt burden would be welcome.”

Progress in meeting terms of its 78 billion-euro bailout has helped sustain Portuguese bonds, with 10-year borrowing costs dropping to a 22-month low of 7.194 percent today from a peak of 18.29 percent in January. Like fellow aid recipient Ireland, the country is targeting a full return to markets in the second half of next year to start funding itself again.

Debt Mountain

The government wants to sell bonds by September when it has to meet a 5.8 billion-euro redemption. While Portugal has sold bills, it hasn’t auctioned bonds since requesting a bailout from international creditors in April 2011.

“I’d say it’s possible, but it’s still not guaranteed,” Teodora Cardoso, president of the Public Finance Council, which carries out independent assessments on government finances, and a former board member of the Portuguese central bank, said in an interview in Lisbon yesterday. “There are still a lot of things to do in terms of profound reforms.”

The Iberian nation has already been granted more time to narrow its budget shortfall after tax increases failed to bring in enough money to meet forecasts as the economy heads for a third year of contraction in 2013.

The government predicts debt will rise to 120 percent of gross domestic product this year before peaking at 122.3 percent in 2014. Portugal aims to whittle its budget deficit to 5 percent of GDP in 2012 after the European Union and International Monetary Fund officials agreed on new targets. It’s planning a shortfall of 4.5 percent in 2013 and then to below the EU’s 3 percent limit in 2014.

Greek Deal

Finance Minister Vitor Gaspar said Dec. 3 that Portugal may have some terms of its bailout from the stability fund eased after Greece gained concessions on Nov. 27.

The interest rate on the rescue loans that Portugal and Ireland are receiving is 3.6 percent. While less than half the yield of 10-year Portuguese bonds, it compares with 1.34 percent on German bunds sharing the same currency.

Ireland has been seeking new terms related to the debt from its crisis-hit banking industry. Irish Finance Minister Michael Noonan told reporters in Dublin on Nov. 29 that the nation is assessing the package given to Greece and will push for anything that helps Ireland’s ability to re-enter the bond market.

Portugal wants to improve its debt profile to avoid an accumulation of future repayments that might spook bond investors. The three measures applied to loans from the stability fund to Greece were an extension of maturities, the possible deferment of interest payments, and a reduction in administrative commissions, according to Coelho.

Payment Crunch

“The first two have greater importance than the third because it’s of interest to us that when we return to the market, investors understand that we don’t have a financing wall,” Coelho said in parliament on Dec. 7.

The national debt agency, known as IGCP, already has exchanged 3.76 billion euros of securities due in September 2013 for the same value of notes maturing in October 2015, lowering its repayment burden for next year.

Convincing euro partners may be trickier. On Dec. 3, Germany ruled out offering easier bailout terms to Ireland and Portugal, saying that financial markets would view concessions as a sign that their aid programs are off track.

Greece is a “very unique case,” German Finance Minister Wolfgang Schaeuble said. “For Ireland and Portugal, which are on the verge of regaining access to markets, it would be a devastating signal and I would really advise them not to pursue this point any further.”

Rating Downgrades

Standard & Poor’s cut Portugal’s credit rating in January to non-investment grade, or junk, following Fitch Ratings and Moody’s Investors Service. Portuguese debt has returned 55 percent this year, including reinvested interest, the most of 26 markets tracked by indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Portugal may count on the ECB for help after President Mario Draghi said in September that debt purchases may be considered for euro-area countries currently under bailout programs when they regain bond-market access.

The measure, called Outright Monetary Transactions, “would not apply to countries that are under a full-adjustment program until full-market access will be obtained,” Draghi said Oct. 4 at a press conference in Ljubljana after policy makers kept interest rates unchanged at 0.75 percent. “The OMT is not a replacement” for a lack of primary-market access, he said.

Buying Bonds

The ECB is likely to intervene in the Portuguese bond market in the first quarter of 2013, Jaime Becerril, an analyst at JPMorgan Chase & Co. in London, wrote in a Dec. 3 note to clients.

Portugal isn’t at a stage yet when the OMT program can be used, ECB Executive Board member Joerg Asmussen said in a Nov. 30 interview with Portuguese newspaper Jornal de Negocios. It will be necessary to issue “reasonable” amounts of bonds with maturities of more than three years, Asmussen said.

The IMF said in a statement on Nov. 20 that it would be important to clarify whether Portugal was eligible for the OMT program as part of its move back into the bond market. Coelho said a day later that the IMF’s observation was “pertinent.”

Easier financing conditions may help the Portuguese economy, which the government projects will shrink 1 percent in 2013 after contracting 3 percent this year. Portugal has grown less than 1 percent a year on average in the past decade, one of Europe’s weakest performances.

Getting that break may be down to the protracted talks that have defined the debt crisis so far. Heads of government are meeting again in Brussels today after convening yesterday.

“It’s evident that everyone likes to have greater ease in paying,” Fernando Ulrich, CEO of Banco BPI SA, said on Dec. 7 at a finance ministry event. “In Europe, you live in permanent negotiation and I think those that are involved in the negotiations are the ones who know what bargaining power they have, what are the weapons and the arguments they have.”

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