Portugal said an extension of the maturities of its aid loans will help the country issue 10-year bonds and regain access to debt markets after requesting a bailout two years ago.
“This deal is extremely important for Portugal because it allows the country to create enough space to issue a 10-year bond and that in turn is a crucial step to regain full bond-market access,” Finance Minister Vitor Gaspar said in Dublin today after a meeting with euro-area colleagues. The extension of seven years is “perfectly sufficient,” he said.
The loan extensions for Ireland and Portugal were agreed on in principle today by finance ministers from the euro area and the remaining 10 European Union states. For Portugal, the agreement is subject to the government showing “continued successful” implementation of its program in a review by international creditors, ministers said in a joint statement.
To complete that review, Portugal has to find alternative measures to meet budget targets set in its 78 billion-euro ($102 billion) bailout after its Constitutional Court last week blocked a plan to suspend the equivalent of a monthly salary payment to state workers and pensioners.
The measures blocked by the court represent 1.3 billion euros of savings in 2013, or about 0.8 percent of gross domestic product. Portugal has set a budget-deficit target of 5.5 percent of GDP in 2013, 4 percent in 2014 and 2.5 percent in 2015, below the European Union’s 3 percent limit. It forecasts debt will peak at 123.7 percent of GDP in 2014.
P0rtugal last auctioned 10-year debt in January 2011 at a yield of 6.716 percent, before it sought a bailout.
The government will “redesign” a measure blocked by the court that affects payments from recipients of unemployment and illness subsidies, Gaspar said. It plans budget savings of about 600 million euros and will bring forward “state reform” measures that may also represent about 600 million euros of savings, he said. Officials from the so-called troika of bailout partners will return to Lisbon on April 15.
Before the court ruling, the government had planned to cut spending by about 4 billion euros in the three years through 2015. Prime Minister Pedro Passos Coelho said today that there are no plans to raise taxes.
Passos Coelho said last month that the government wants to reduce its refinancing needs in 2015, 2016 and 2020. Both Ireland and Portugal received rescue loans from two different programs: the EU-wide European Financial Stabilization Mechanism and the euro-area’s temporary firewall, the European Financial Stability Facility.
Portuguese government debt agency IGCP said in its monthly bulletin in March that EFSM loans have an average maturity of 12.4 years and an interest rate cost of 3 percent; EFSF loans have an average maturity of 14.4 years and a cost of 3 percent; IMF loans have an average maturity of 7.3 years and a cost of 3.9 percent. In total, the average maturity is 11.2 years and the cost is 3.3 percent, according to IGCP.
“This extension is very important because it allows Portugal and Ireland to smooth their debt redemption profiles and consequently it reduces the two countries’ financing needs in the post-program period,” Gaspar said. Portugal’s aid program ends in May 2014.
Portugal has followed Ireland in selling bonds this year. It sold 2.5 billion euros of five-year bonds through banks to yield 4.891 percent.
Ten-year bond yields fell 5 basis points to 6.31 percent today. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds has narrowed to 5.05 percentage points from a euro-era record of 16 percentage points in January 2012.
“Ireland and Portugal had parallel treatment despite being at different phases of their adjustment programs,” Gaspar said. “Portugal has tried to follow Ireland’s steps as close as possible.”