Fleeing Foreigners Impede Portugal’s Own Exit PlansAnabela Reis
Portugal’s plan to leave its bailout program and return fully to international markets risks being hindered by some investors making their own exit.
Foreign money managers were net sellers in June and July after buying in May, increasing the proportion of securities owned by residents. Domestic banks held a record 33 billion euros ($45 billion) of the nation’s government debt on Aug. 31, European Central Bank data published last week showed.
“When investors decide to go out for a while, it takes a lot for them to go back in,” said Huw Worthington, a fixed-income strategist at Barclays Plc in London. “You need those foreign investors. Without them, Portugal issuing debt for longer maturities will be very difficult indeed.”
Portuguese bonds were the worst performers in the euro region in the third quarter as a rift in the government over budget policy threatened to derail plans to end reliance on emergency funding and avoid a second bailout package. Yields on the country’s 10-year securities, which breached 8 percent on July 3, exceed those of Ireland and Belgium combined even after the rate fell today to a one-month low of 6.5 percent.
The country is scheduled to leave its aid plan by June 2014, while fellow recipient Ireland is aiming to return fully to credit markets earlier. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all rate Portugal as non-investment grade, or junk. Ireland is rated junk only at Moody’s.
Portugal’s debt is forecast to peak at 127.8 percent of GDP this year, the European Union, ECB and International Monetary Fund in a joint statement yesterday after completing the country’s eighth and ninth reviews.
Public debt is “clearly” sustainable, Finance Minister Maria Luis Albuquerque said at yesterday’s press conference. The country plans to resume regular bond issuance next year and doesn’t rule out another bond sale this year, Albuquerque said. It also aims to do some debt exchanges, she said.
“Broadening the investor base will be very difficult with the risk-taking capacities of the domestic private sector constrained and non-investment grade ratings keeping institutional investors on the sidelines,” Michael Leister, a senior rates strategist at Commerzbank AG in London, advised clients in a note on Sept. 26.
Portugal’s debt handed investors a loss of 1.4 percent in the July to September period, the worst performance of 14 euro-area sovereign markets tracked by Bloomberg World Bond Indexes. Spanish securities earned 3.1 percent, Italian debt gained 1.7 percent and Greek bonds added 11 percent, the indexes show.
Government bonds and Treasury bills held by Portuguese investors rose to a record 62.6 billion euros at the end of July, up 16 billion euros from March 2011, which was a month before the country requested aid, according to the latest figures from the Bank of Portugal.
Debt owned by foreigners retreated for a second month to 68 billion euros in July. Data for August won’t be published until later this month. The total includes the holdings of Portuguese debt by the ECB, which stood at 22.8 billion euros of bonds under the Securities Markets Program as of December.
While BlackRock Inc., the world’s largest asset manager, said last week Portuguese bonds were among the euro-region debt it had been buying, the shift toward domestic money is likely to increase. More of the country’s pension reserves will be invested in bonds, part of the bailout program agreed with the ECB, European Commission and IMF.
The Social Security Financial Stabilization Fund, which keeps enough money to cover at least two years of payments to retirees, is increasing the proportion of domestic debt that it holds to as much as 90 percent from 55 percent. That still won’t be enough to fill the void, said Leister at Commerzbank.
“One-off measures are insufficient to solve structural supply-demand imbalances,” he said.
Foreign investors became net-sellers after increasing their holdings in May, when the country sold 10-year bonds for the first time in more than two years, according to a presentation by the country’s debt agency IGCP.
Ten-year bond yields declined to 5.19 percent on May 21, the lowest since August 2010 and narrowing the difference over equivalent German debt to 384 basis points, or 3.84 percentage points. The spread was 468 basis points today after rising to a high of 595 on July 12, data compiled by Bloomberg show.
Portugal’s Deputy Prime Minister Paulo Portas said two weeks ago that the government would be interested in negotiating a precautionary program after the external aid plan ends. The Finance Ministry denied Sept. 28 that there talks about a second aid package following a report by newspaper Publico.
Last year, the ECB unveiled its Outright Monetary Transactions program, an as-yet-unused pledge to buy the bonds of crisis-hit countries in the euro area that sign up to reform conditions. ECB President Mario Draghi has said eligibility is conditional on a country having full-market access, suggesting a broad spectrum of investors must be willing to buy fresh debt before the nation can qualify for help.
“Portugal exiting its bailout as smoothly as Ireland seems unlikely,” said Worthington at Barclays. “The prospect of a second bailout is becoming higher.”