Portugal Prepares for Worst as Greek War of Attrition Escalates

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If the alarm sounds over a Greek default, one country at least says it’s ready.

As Greece clashed with creditors since January, Portugal sold longer-maturity bonds and reduced its debt burden for the next three years. The government built up enough cash to meet debt obligations until the end of the year and in March made an early loan repayment to the International Monetary Fund, taking advantage of falling borrowing costs after the European Central Bank announced a bond-buying program.

“Portugal will not be caught unprepared in an emergency situation,” Prime Minister Pedro Passos Coelho said in Oporto, northern Portugal, this week. “We are prepared for any situation of greater volatility.”

With Greece on the brink of running out of money and at risk of reneging on its June 30 IMF repayments, Portugal is desperate to make sure it doesn’t get dragged back into another debt crisis emanating from Athens. The country was forced to seek a financial rescue in 2011, following Greece and Ireland.

Portugal’s debt remains larger than its economy, higher than in 2011 and is still considered junk by the three main rating agencies. Yet economic growth is accelerating and company executives say credit markets are functioning. German Chancellor Angela Merkel lauded Portugal this week as a country that had learned to stand on its own two feet by taking steps to fix its finances, urging Greece to do the same.

Seeking Normalcy

“The market is working, both banks and the debt market,” said Jose Freire, chief operating officer at Portuguese publisher and broadcaster Impresa SGPS SA. “In 2011-2012 these two closed. At this moment the market is normal, there’s only been an increase in interest rates for longer maturities.”

Portugal’s 10-year bonds yield 3.07 percent, twice what they did on March 12 as investors dumped some European fixed-income assets and Greece’s standoff with creditors lengthened. The yield had climbed to more than 18 percent in 2012.

Should borrowing costs become harder to sustain, the ECB has greater scope to intervene, according to Cristina Casalinho, head of Portuguese debt agency IGCP. Portugal also has built up its own “line of defense,” she said.

“The mechanisms that exist to protect European states are completely different from the past,” Casalinho said in an interview with SIC Noticias this week. “Sometimes people think we will return to a situation like there was in 2011.”

Different World

Companies are benefiting too. EDP-Energias de Portugal SA, Portugal’s biggest utility, in April raised 750 million euros ($856 million) selling 10-year bonds. They yield 3.49 percent compared with 2.05 percent on their first day of trading.

Despite the recent volatility in the market, “the situation now is totally different,” EDP Chief Financial Officer Nuno Alves said.

The government forecasts growth to accelerate, with the economy expanding 1.6 percent this year and 2 percent in 2016. It grew 0.9 percent in 2014, ending a three-year recession. The European Commission said on May 5 that Portugal’s debt ratio peaked at 130.2 percent of gross domestic product in 2014.

“If today we face this uncertainty and these risks with greater security and confidence, that’s owed to preparation work that wasn’t done half a year ago, but which began four years ago,” Coelho said on Friday.

Portugal started gathering cash before its three-year aid program ended in May 2014. It expects to have 9.8 billion euros to hand at the end of 2015, enabling the government to withstand any volatility in markets, Coelho said this week.

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“Four years ago the bet was that Portugal would follow Greece,” said Freire at publisher Impresa. “That’s not what happened. Portugal made its way, restructured the economy, and we are benefiting from that at this moment.”

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