April 4 (Bloomberg) -- As Portugal enters the final stretch of its three-year rescue program, the country now finds itself at a fork in the road to recovery with one route charted in Dublin and the other in Brussels.
Ireland in December became the first nation to draw a line under its part in the euro area’s debt crisis, choosing to go it alone and not bother with the precautionary credit line advocated by the European Commission. Six weeks before Portugal’s aid program ends on May 17, the country’s 10-year bonds yield 3.89 percent, 37 basis points more than at the same juncture for Ireland before its bailout exit.
“Insurance is sometimes good but has costs, and you have to weigh the advantages and the costs,” Bruno Macaes, Portugal’s secretary of state for European affairs, said on April 2. “One cost is perhaps that people will be less inclined to think that we have concluded our adjustment process.”
Portugal is trying to regain full access to debt markets after relying on 78 billion euros ($107 billion) of emergency money the past three years. Unlike Ireland, it’s still considered non-investment grade by all three major ratings companies, though has managed to raise enough money from selling bonds via banks to see it through part of 2015 if necessary. Portugal plans to resume bond auctions this quarter.
Portuguese 10-year bond yields have dropped 216 basis points since Ireland’s program ended on Dec. 15. Irish bonds declined 50 basis points to yield 2.97 percent today. Portugal pays interest of about 3 percent on its bailout loans.
“Up until a year ago, it was commonly thought that Portugal might have to take another full bailout package, but now there is a realistic possibility that it can emulate Ireland’s clean break,” Cantor Fitzgerald Ireland Ltd. analysts Ryan McGrath and Fiona Hayes said in a March 24 note.
The next scheduled meeting of euro-region finance ministers is on May 5. The government will decide on the exit strategy “very soon,” Macaes said in an April 2 interview on Bloomberg TV’s “The Pulse” with Francine Lacqua and Guy Johnson.
Irish Finance Minister Michael Noonan said in Brussels on Nov. 14 the decision to fly solo without a credit line was based on timing and the country’s 20 billion euros of cash reserves, sufficient funding until 2015.
Portuguese 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 has already started to obtain funding for 2015, the IGCP said on Feb. 11. It raised 6.25 billion euros selling bonds through banks so far this year as signs of an economic recovery spurred a rally in higher-yielding European fixed-income assets.
Should Portugal opt for a credit line, such a program would need to go through a political approval process, something that Noonan said had deterred the Irish.
That includes passage through legislatures such as the German parliament, according to the rules for the European Stability Mechanism rescue fund, or ESM. The decision in Finland can be approved by the parliament’s Grand Committee and a full plenary vote would not be necessary, Peter Saramo, a committee counsel, said in March. European parliamentary elections are due May 22-25.
“Recent economic and political developments strongly point to a ‘clean exit’ from Portugal’s current bailout,” Eurasia Group analyst Antonio Roldan said in an April 2 note. “European elections will reinforce the desire of the government and Germany to sell good news on program exit.”
There’s also the risk of more strings attached to the money as the government presses on with its austerity package.
“Requesting a credit line, even with the stated intention of not using it, would come with significant political cost as the Portuguese authorities would have to agree to further ‘conditionality’,” Kathrin Muehlbronner, a senior analyst at Moody’s Investors Service, said in a March 28 report.
While ESM chief Klaus Regling has also said Portugal might follow Ireland without assistance, for the European Commission it’s a matter of safety first, according to Economic and Monetary Affairs Commissioner Olli Rehn.
“We are still of the view that better safe than sorry, but at the same time there have been significant improvements in the Portuguese economy and in the perception of the markets of the Portuguese economy,” he said in Athens on April 1.
Prime Minister Pedro Passos Coelho still has to trim spending by 3.2 billion euros in 2014 to meet a target for a budget deficit of 4 percent of gross domestic product in 2014 after relying mostly on tax increases in 2013.
Debt increased to 129 percent of GDP in 2013 and the government forecasts it will fall to 126.8 percent in 2014. Finance Minister Maria Luis Albuquerque said on March 19 that Portugal must have a budget surplus before interest payments for a “prolonged” period of time to be able to reduce the burden.
Yet the economy is growing again. GDP will expand 1.2 percent this year after contracting 1.4 percent in 2013, the central bank said on March 26. Export growth will be 5.3 percent this year after 6.1 percent growth in 2013.
It’s now up to Portugal to decide whether to seek a precautionary line at the end of its rescue program, German Finance Ministry spokesman Martin Chaudhuri said in an e-mailed response to questions on March 26.
“For Germany, the improved economic outlook, the return of financial market confidence as well as Portugal’s good implementation of reforms during the adjustment program speak in favor of the possibility of a clean exit,” Chaudhuri said.
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