Portugal Reaches Agreement With Some Banks on ‘Toxic’ Contracts

Portugal reached an agreement with some banks to reduce an approximately 3 billion-euro ($3.9 billion) “toxic” bill from derivative contracts that the lenders signed with state-owned companies, said Maria Luis Albuquerque, the secretary of state for treasury and finance.

“These agreements will enable the Portuguese state to save 170 million euros in interest payments in coming years and immediately reduces about 20 percent of potential responsibilities,” Albuquerque said at a press conference in Lisbon last night.

The government failed to reach an agreement with JPMorgan Chase & Co. and Banco Santander Totta SA on some of these contracts and will “proceed to defend its interests by resorting to the competent courts,” Albuquerque said. Information about the contracts, which were signed before the current government took office in 2011, was submitted today to the Prosecutor General’s Office, she said.

Portugal is preparing new measures to meet the budget-deficit targets in its 78 billion-euro international aid program after the country’s Constitutional Court on April 5 blocked a plan to suspend some payments to pensioners and state workers. The negotiations with the banks about the derivative contracts started two months ago as the government sought reparation for financial losses.

‘Elevated Risks’

“These instruments represent potential financial responsibilities for the state budget that reach about 3 billion euros,” Albuquerque said. The contracts typically had positive short-term effects and “elevated risks” later, she added. “There were contracts with interest rates well above 20 percent that even in a scenario of higher rates would not have favorable results for the public companies that signed them.”

Santander Totta, the Portuguese unit of Banco Santander SA, said in a statement that it’s “sure of its position,” and that its agreements were signed from 2005 to 2007, when interest rates were expected to rise. The lender said it made proposals in negotiations with Albuquerque that were “very favorable” to the state and were rejected. Jennifer Zuccarelli, a spokeswoman for JPMorgan in New York, declined to comment.

The debt of non-financial public companies reached about 30 billion euros in June 2011, up from 14.6 billion euros at the end of 2004, according to Albuquerque. The government is also facing a “heavy burden” from contracts signed with public-private partnership contracts and is re-negotiating these contracts, she said.

Deficit Goals

The government on March 15 announced less ambitious deficit-reduction goals as it forecast the economy will shrink twice as much as previously estimated this year. The government now targets a deficit equivalent to 5.5 percent of GDP in 2013, 4 percent in 2014 and below the EU’s 3 percent limit in 2015, when it aims for a 2.5 percent gap. It forecasts debt will peak at 123.7 percent of GDP in 2014.

Before the court ruling, the government had planned to cut spending by about 4 billion euros in the three years through 2015. About 80 percent of the 5.3 billion-euro deficit-trimming effort in the 2013 budget comes from revenue gains, including 3.7 billion euros of tax increases.

Albuquerque’s statement didn’t name the banks that reached agreements with the government. She said three other banks are taking a few more days to decide whether to accept the government’s terms.

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