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Portugal to exit €78bn bailout without emergency backstop

Portugal is to exit its three-year €78bn ($10.82 billion) bailout without an emergency backstop, in a remarkable turnround for a country that only six months ago seemed destined for a second rescue programme.

Portugal follows Ireland as the second eurozone country to opt for a clean exit from a punishing rescue programme. An announcement by Pedro Passos Coelho, the prime minister, is expected before a meeting of eurozone finance ministers on Monday, just weeks before the programme comes to an end on May 17, according to officials involved in the bailout talks.

The "troika" of international lenders – the European Commission, International Monetary Fund and European Central Bank – had urged Lisbon to consider a line of credit as an emergency safety net, especially given its debt redemptions over the next two years. But Portugal's success in raising cash in the private markets has convinced the government that such assistance is unnecessary.

Portuguese Prime Minister Pedro Passos Coelho arrives at the EU headquarters in Brussels on March 20, 2014.
Thierry Charlier | AFP | Getty Images
Portuguese Prime Minister Pedro Passos Coelho arrives at the EU headquarters in Brussels on March 20, 2014.

"Clearly the market developments and the market euphoria has influenced it," said one official involved in the talks.

Without accepting a eurozone line of credit, Lisbon would not be eligible for the ECB's emergency bond-buying plan, known as outright monetary transactions.

According to troika officials, the German government was urging Lisbon to proceed without the line of credit; Berlin has been eager to avoid debates in the Bundestag over eurozone aid.

But one official said relations between Angela Merkel, the German chancellor, and Mr Passos Coelho were very close, and that Berlin would have signed off the assistance had Lisbon decided it was required.

Political and public opposition to reforms and austerity has been growing in Portugal. Troika officials said it would have been difficult for the government to meet the reform criteria that would have come with a line of credit from the eurozone's €500bn rescue fund, the European Stability Mechanism. Such conditions can be just as stringent as a bailout.

A mission from the troika was due to leave Lisbon on Wednesday or Thursday after concluding its final quarterly assessment of the government's compliance with the adjustment programme.

The centre-right government coalition also set out its fiscal strategy for 2015-18 on Wednesday, a move partly designed to reassure global investors that Lisbon remained committed to reducing its deficit and budgetary discipline once the bailout ended.

A formal announcement on Portugal's clean exit strategy will follow, possibly as early as Friday.

Officially, the government will not make a final decision until a special cabinet meeting this week. "The national interest demands that Portugal decide as late as possible," Luís Marques Guedes, parliamentary affairs minister, said on Tuesday.

Bankers and economists have been almost unanimous in forecasting Portugal's unaided return to market funding. Analysts at Nomura said on Wednesday that "improvements in the [Portuguese] economy and market sentiment in the past few months" had "tilted the balance in favour of a clean exit".

Portugal's government borrowing costs have tumbled in recent months to levels similar to those of Ireland when it emerged from its €67.5bn rescue programme. Lisbon has also built up a cash buffer of €15bn, enough to cover state borrowing requirements for a year.

"The great thing is to have a choice [between a clean exit and a credit line]," a senior Lisbon government official said. "Eight months to a year ago, not many people saw that as likely."

A clean exit meant Portugal would emerge from its adjustment programme "not owing anything to anyone", the official said. A credit line was more like "an insurance policy you never want to use".

An ESM credit line, which Lisbon would use only if necessary, would be available for one year and limited to a maximum of 10 per cent of gross domestic product, about €16bn-€17bn.

Last week, the prime minister said a disadvantage of seeking an ESM credit line was that such a safety net had never been negotiated before, making it unclear what conditions would be attached to it.

—By Peter Spiegel in Brussels and Peter Wise of The Financial Times

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