As Greece Nears a Big Debt Deal, Investors Now Fret That Portugal Will Ask for the Same
Despite the best efforts of European politicians to place a quarantine fence around the Greek economy, the crisis there continues to plague Portugal.
The authorities in Lisbon insist otherwise, but investors are predicting that Portugal will be next in line to impose losses on bondholders as it struggles to meet the terms of a 78 billion-euro, or $103 billion, bailout agreement struck with international creditors last May.
While a short-term debt auction on Wednesday went off comfortably, Portugal’s long-term borrowing costs remain unsustainably high, and spending cuts that are cleaning up public finances are also helping to plunge Portugal into one of the deepest recessions in the Western world. Its economy is predicted to contract 3 percent this year, and the unemployment rate, at 13.6 percent, is one of the highest in the euro zone.
Whatever deal with creditors is reached in Athens in the coming days, “it’s most likely that Portugal will say that it wants one of those, too,” said Edward Hugh, an economist in Barcelona who has been tracking the euro zone’s debt crisis. Portugal “literally has nothing further to lose, except some of its debt burden,” he said.
Lisbon’s center-right coalition government, which came into power last June, insists that it needs more time rather than more money. Prime Minister Pedro Passos Coelho said on Tuesday that Portugal would comply with the agreement reached last May, “whatever the cost.”
The International Monetary Fund , alongside other creditors involved in the debt repayment negotiations in Athens, also emphasizes that Greece need not set a precedent for other ailing economies like Portugal.
“It’s going to be hard for Portugal, but we’re talking about different numbers, and Portugal’s tax collection system is much more effective,” said Albert Jaeger, who heads the I.M.F.’s office in Lisbon. He added: “The most important advantage that Portugal has is probably its internal political and social consensus.”
Domestic discord continues to be one of the main stumbling blocks in Athens, with Prime MinisterLucas D. Papademosstruggling to secure backing from the three parties in his shaky coalition — particularly over private sector wage cuts — before signing a deal with creditors that will also require majority approval from Parliament. Mr. Papademos is set to meet with the party leaders Thursday to work out an agreement that could be discussed at a meeting of European finance ministers in Brussels on Monday.
Such a sense of urgency is not felt in Lisbon. The country’s public debt is expected to reach 112 percent of gross domestic product this year, compared with 190 percent in Greece, according to the I.M.F. Mr. Jaeger said Portugal would not need to return to the long-term debt market for further financing for well over a year. In September 2013, Lisbon must repay 9 billion euros of debt. “Portugal’s debt is sustainable, and we do not see the need” for emergency negotiations between Lisbon and private bondholders, he said.
On Monday, however, the yield on Portugal’s benchmark 10-year bonds flirted with 17 percent, its highest level since the inception of the euro. Five-year credit-default swaps on Portuguese debt, a type of insurance against default, also recently set record highs, indicating that investors saw a 70 percent chance that the country would default.
The yield on Portugal’s 10-year bonds was back down to 14.2 percent on Wednesday, part of a broader rebound on European bond markets and following an oversubscribed Portuguese auction in which Lisbon sold 1.5 billion euros of Treasury bills, the targeted amount, at lower yields than two weeks ago.
Still, Francesco Franco, an assistant professor at the Nova School of Business and Economics in Lisbon, said that “Portugal’s efforts have not succeeded in anchoring market expectations,” in terms of convincing investors that Lisbon could simply stick to the 78 billion-euro package. Instead, he said, “the Greek deal, if successful, is seen as an alternative template.”
Persuading bondholders otherwise is a tall order for the Portuguese authorities — and not only because of the poor example set by Greece.
“The markets are pricing a default because Portugal’s growth track record has been poor,” said Cristina Casalinho, chief economist of BPI, a Portuguese bank. Having missed out on the construction boom years and averaging annual growth of less than 1 percent over the last decade, Portugal is now sinking into recession faster than predicted, with recent public spending and wage cuts, coupled with tax increases, choking off consumer demand.
Still, Mr. Passos Coelho is adhering to the economic program agreed to with creditors — and winning plaudits from them. “The program is off to a good start and is on track,” Mr. Jaeger of the I.M.F. said.
Among significant breakthroughs, the government recently agreed with employers and unions to extend working time while cutting severance payments.
Lisbon has also made progress in its privatization program, selling a 21 percent stake in EDP Energias de Portugal, the national electric company, to China Three Gorges for 2.69 billion euros in December.
Portugal’s progress compares favorably with neighboring Spain, whose government has been struggling to persuade employers and unions to agree on a labor market overhaul. Madrid also recently shelved the sale of its national lottery operator and largest airports.
“The rise in Portugal’s credit-default swaps is more a reflection of the external environment and not the result of any domestic failure to implement the reforms agreed last year,” said Gonçalo Pascoal, chief economist at Millennium BCP, a bank in Lisbon. “If the government continues to implement the required structural reforms, and the external environment improves, the yields are likely to retreat.”
That is a big if, however, especially given that “economic reforms of this sort take a long time to produce results,” said Luís Cabral, an economics professor from Portugal at New York University’s Stern School of Business. Until then, he added, “it is likely that Portugal will need longer debt repayment terms or simply additional bailout funds.”
And however significant the structural and political differences between Greece and Portugal, the two countries are the only euro zone economies to have their debt rated as junk by all three major rating agencies.
In a recent report, Erik F. Nielsen, the global chief economist for UniCredit, underlined the growing differentiation made by investors between Greece and Portugal on the one hand, and other euro economies on the other.
Even if the market had perhaps “gone a bit ahead of itself on Portugal,” he added, “surely it is a country we’ll be talking a lot more about in the months to come.”