Portugal to Emulate Ireland in Exit From Bailout Program

Portugal will follow Ireland in leaving its rescue program without seeking a precautionary credit line, the third nation to exit its bailout as the euro region rebounds from a four-year crisis.

The decision, announced in Lisbon late yesterday, follows Portugal’s first bond auction last month since requesting the 78 billion-euro ($108 billion) rescue from the European Union and the International Monetary Fund in 2011. With the program scheduled to end on May 17, euro-region finance ministers will discuss Portugal when they meet in Brussels today.

“In a sense this marks the end of the chaotic destruction of the first half of the decade which launched the eurozone crisis,” Lena Komileva, chief economist at G Plus Economics, said in a note today. “Market panic about the possibility of a liquidity credit event in the eurozone’s periphery has receded. Still, this does not mean that this risk has disappeared.”

The European Commission underscored the fragility today as it trimmed its economic-growth forecast for the euro area, predicting that low inflation will remain a threat to expansion and warning of the impact of tensions with Russia.

Borrowing Costs

Portugal will be the third in line to leave its rescue program after Ireland became the first to do so in December, followed in January by Spain’s exit from its bank bailout. That leaves Cyprus and Greece still subject to bailout programs four years after the Greek government was granted outside aid in May 2010 at the onset of the sovereign debt crisis.

Portugal’s borrowing costs have dropped since the beginning of 2012, helped by signs of economic recovery and a market rally spurred by the European Central Bank’s pledge to do what it takes to defend the euro.

The 10-year bond yield dropped to as low as 3.605 percent today, the least since 2006, after reaching more than 18 percent in January 2012. The yield was at 3.608 percent as of 3:43 p.m. in Lisbon.

Prime Minister Pedro Passos Coelho said after a cabinet meeting in Lisbon yesterday that the government’s decision to exit without resorting to any financial backup was “the right choice at the right time.”

“We are making this choice because the strategy of returning to the market was successful, and because we made enormous progress in budget consolidation and because we recovered our credibility,” Coelho said. “We have financial reserves for a year, which protect us from any external disturbance.”

Never Negotiated

The country has already started to obtain funding for 2015 and built up a cash buffer before the end of the aid program. 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. It raised 6.25 billion euros selling bonds through banks so far this year.

Coelho’s decision not to seek a backup line of credit was anticipated by analysts at banks including Citigroup Inc., Commerzbank AG and Danske Bank A/S.

The prime minister said on April 23 that one of the disadvantages of opting for a precautionary credit line is that it has never been negotiated before and no one can say what conditions would be associated with it. Such credit lines can be provided by the European Stability Mechanism rescue fund.

“Today in Europe, there are stronger mechanisms and guarantees to respond to systemic crises and to prevent them,” Coelho said last night.

Olli Rehn, who is on election-campaign leave from his job as European Commissioner for Economic and Monetary Affairs, said last month that demands in his native Finland for safeguards on loans to other euro members were preventing Portugal from taking a credit line.

Credit Rating

“We always believed that Portugal would be able to make it and now it looks like it,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels. “It shows, after the good examples of Ireland and Spain, that Portugal is also on the right track and that Portugal is to be lauded for all it achieved in the past years.”

Portugal’s securities are still rated below investment grade by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Ireland, which no longer has a junk rating, entered its

67.5 billion-euro bailout in November 2010, six months before Portugal got its package. Spain requested as much as 100 billion euros of aid for its banks in June 2012, and Cyprus entered a 10 billion-euro bailout program in March 2013.

“After announcing a ‘clean exit’ over the weekend, Moody’s and S&P will review their ratings,” Rainer Guntermann and David Schnautz at Commerzbank AG said today in a note. “At the minimum, Portugal should have positive outlooks by Moody’s, S&P and Fitch by Friday.”

‘Full Picture’

Portugal, with gross debt of 214 billion euros, will remain under scrutiny even without a precautionary program. The government still has to trim spending in 2014 to meet a target for a budget deficit of 4 percent of gross domestic product. Coelho forecasts the shortfall will drop below the EU’s 3 percent limit in 2015, when he aims for a 2.5 percent gap.

“The surge in market optimism does not reflect a full picture of the challenges that still lie ahead,” Antonio Roldan, an analyst at Eurasia Group, said in a May 1 note. “The question now is whether the country will be able to achieve sufficiently large and sustained economic growth to respond to its huge debt and unemployment challenges.”

The European Commission will support Portugal in its decision on exiting the bailout, commission Vice President Siim Kallas said in an e-mailed statement.

International Monetary Fund Managing Director Christine Lagarde said that while Portugal still faces challenges, the country is in a “strong position” to finish consolidating its public finances and to deepen structural reforms.

“We are on the right path to never again allow Portugal to go through another collapse, another rescue, another national emergency,” Coelho said.

(Updates yields in seventh paragraph, adds comment from German finance minister in 15th.)
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