Portugal Recourse to OMT Would Aid Market Access, IMF Says

Portugal’s aim to regain sustainable market access would be bolstered if the country could qualify for the European Central Bank’s bond-buying program, the International Monetary Fund said.

“Eligibility to the ECB’s Outright Monetary Transaction program would also go some way in helping improve the monetary transmission mechanism in Portugal and secure durable market access,” the Washington-based lender said in a staff report about the seventh review of the aid program for Portugal. “Of course, OMT should not be seen as an alternative to market financing, but at the same time the latter is not entirely independent of OMT eligibility.”

Abebe Aemro Selassie, head of the International Monetary Fund’s mission to Portugal, said in a call with reporters that OMT is one of the options available.

“Whether it’s OMT or other steps they have taken, what we want to see is the fragmentation and high lending rates in Portugal being addressed as soon as possible,” Selassie said. He referred to helping small and medium-sized companies’ access to credit as “key.”

The ECB’s bond-buying program unveiled last year for euro-area nations willing to sign up to austerity conditions has soothed debt markets without yet being triggered. The so-called OMT wouldn’t apply to countries that are under a full adjustment program until “full market access” is obtained, President Mario Draghi said in October.

‘Crisis Management’

“Portugal remains vulnerable to shocks stemming from the other euro-area countries,” the IMF said. “Domestic efforts need to be complemented by institutional reforms and strong crisis-management policies at euro-area level to support Portugal’s path toward a durable return to market financing.”

The lengthening of the maturities of the country’s aid program loans will also support the government’s return to full market financing during 2013, according to the report.

Portugal is in the third year of a 78 billion-euro ($104 billion) rescue by the European Union and the IMF. Last month, it sold 10-year debt for the first time in more than two years as yields on the country’s existing bonds were at the lowest since 2010.

The nation pays 6.5 percent to borrow for a decade, down from a 2012 average of 10.6 percent. The extra yield investors demand to own Portugal’s 10-year bond rather than German bunds has shrunk to 4.86 percentage points from a euro-era record of 16 percentage points in January 2012.

Requirements Met

The country is starting on the pre-financing for 2014 and has already been able to meet its requirements for this year, Finance Minister Vitor Gaspar said on May 7. The Portuguese bailout program ends in June 2014.

“Portugal’s debt trajectory remains sustainable under baseline assumptions, but is vulnerable to plausible shocks,” the IMF said. The fund forecasts debt to peak at close to 124 percent of gross domestic product in 2014. “The risk of a higher still debt peak is high given the significant downside risks to the current growth projections.”

The IMF said that scope to stray from the current fiscal deficit path is minimal without raising debt sustainability concerns.

The Portuguese government on March 15 announced less ambitious targets for narrowing its budget deficit as it forecast the economy will shrink twice as much as previously estimated this year. Portugal in September had already been given more time to narrow its budget gap after tax revenue missed forecasts.

Social Tensions

The EU may consider extending the deadline for Portugal to meet its deficit targets if economic conditions worsen, Jeroen Dijsselbloem, head of the group of euro-area finance ministers, said on May 27. Dijsselbloem said the government hasn’t yet requested another change of timetables and targets.

A deeper recession and higher unemployment levels are “exacerbating social and political tensions and, in turn, testing the government’s resolve to continue with adjustment policies and reforms,” the IMF said.

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