CNBC Interview: Minister of Finance for Portugal, Maria Luís Albuquerque

Following is the unofficial transcript of a CNBC interview with Maria Luís Albuquerque, Minister of Finance for Portugal, by Julia Chatterley at the IMF Spring Meetings, Washington, on Monday 20th April 2015.

Julia Chatterley (JC): Is there a growth upgrade for Portugal both this year and next coming up into this meeting? The recovery continues.

Maria Luís Albuquerque (MA): Yes, fortunately things seem to be improving. So, still challenging but it looks like the worst is behind us, which is good.

JC: You've been a beneficiary of the weaker Euro. Have you been surprised actually by how quickly it's moved and how much it's fallen?

MA: That the interest rates you mean?

JC: The Euro.

MA: The Euro. Yea, well, we've had a few positive effects, especially for the exports, exports of our economy, including the devaluation of the Euro. Also, the oil prices falling are beneficial to us, and also the impact of QE- all that together helps to improve the economic outlook.

JC: You're seeing your funding costs come down as well, which is an important point, and a pickup in lending, crucial too for the real economy. Is this evidence of QE in action in your view?

MA: There is clearly evidence of this, uh, reduction on interest rates. Uh, the impact in terms of credit flows, sizeable credit flows, is still lagging somewhat, but for many companies the effect of interest rates coming down is already being felt, so it is clearly positive to the economy as well, and also for the cost of funding of the treasury.

JC: It's almost more important in terms of confidence now. Is that the point?

MA: Uh, the main issue is about confidence because for investment you need confidence that things will improve, and when we see the ECB putting in place these kind of policies that did indeed boost confidence in the Euro area prospects, and that has been helping as well.

JC: I mean Portugal was seen to be one of the key beneficiaries of QE. We're talking about almost a quarter of your outstanding bonds being bought by the ECB, helping to bring funding costs down. Just give me of financing right now in terms of just how well financed you are in terms of time. Are we looking at 2016 now?

MA: Well, when it's- when it's respect to the treasury itself, we have a significant cash buffer (?). We have just reimbursed part of the IMF loan with a very significant interest costs savings, which is very important for the budget, and also to demonstrate that we are fully back in the market, able to tap it at longer maturities. The impact on both the sustainability of the debt, the redemption profile, and the interest costs, has been very, very positive, yes.

JC: I want to pick up on one point about the banks. A potential blot on the horizon is the EU regulators looking at the treatment of deferred tax assets, and whether or not they qualify for capital, just to allay investors' fears about what would happen as far as the Portuguese banks are concerned, if that were decided to be the case. What is the situation?

MA: Well, the DTA regime in Portugal has a key difference from the other situations. First, the DTAs, uh, exist in these countries because there are significant differences in tax regimes, uh, which makes it reasonable and necessary in these economies, and not necessarily in the others. But in our case, we have a particular future, which says that if and when the banks do, um, transform those DTAs into tax credits, the state has the right to convert the same amount plus 10% into bank shares. So that works as a disincentive for banks to use this uh, this possibility and also it significantly reduces the taxpayer's risk in this respect. So it is different from other regimes and in that respect I think it is a, it's more positive and less hindering to competition than others may be. But we, we of course know that there is this analysis on-going. We don't feel that there is reasons of major concern at this stage.

JC: So you think that protects you relative to other countries in a sense, in terms of raising fresh capital if this decision were to effectively go against you.

MA: Well, the incentives for the banks to use other sources of capital is already embedded in the solution, so the probability of them actually transforming the DTAs into tax credits is lower that in, than maybe in other situations.

JC: We're now five months away from a general election, and I don't think we could forget that. A number of analysts out there are asking whether or not you're now giving up on certain reforms, slowing the pace of reform be it. I can name a few - liberalizing the transport energy sector, further liberalizations in the labour market. Is that a harsh criticism, or is it natural in this sense to see a slowing in the pace of reforms as you head towards an election?

MA: We don't see a slowing in the pace of reforms, and we know that that criticism is being made. But indeed when you look at the labour market, for example, we were able to have an agreement with the Social Partners, and it is very important because you want to have these labour market reforms in a context where there is social peace. So, we want to take this, we have this approach gradually so that we can do it in agreement with the Social Partners, and a lot has been done already. And also when we first do reforms, we also need to observe the effects of such reforms, see if they need to be recalibrated. There are many reforms still that need to be done, but we continue to do reforms and we continue to announce reforms going forward, so we do reject that criticism. We think it's simply not valid.

JC: And it's not you taking your foot off the pedal because of QE and the benefits that you're seeing as far as interest rates are concerned.

MA: No. Actually, QE provides an opportunity to continue to do reforms while we have these advantages in the financial front, or the financial conditions being supported by QE. So this is indeed an opportunity to continue to pursue reforms, not an opportunity to, to lay back. Otherwise, when QE is over, and it will eventually be over, we would have benefited a lot less than we could otherwise.

JC: What about risks on the horizon now? I think we have to talk about Greece. The general consensus I hear is ultimately that we are going to reach an eleventh and a half hour solution here. Is that your base case too?

MA: It's difficult to predict at this stage. Um, at this particular point it's really up to the Greek authorities to decide how they want to position themselves. The Eurogroup partners continue open to a solution, and continue to be constructive, so we continue to follow those, those uh, those discussions and participate constructively in such discussions. But it's mostly in the Greek authorities' hands more than in anyone else's.

JC: Can you put yourself in that position as a minister who's undergone the kind of reforms that a country needs and the difficulties they've got back at home be it with the third largest party is Golden Dawn, that the risk of fracture the government would be with these reforms. Do you think there's enough of an appreciation of that from the Eurogroup and the IMF in these negotiations?

MA: Well, from the Eurogroup which I can kind of speak in a better position because I am also in those meetings, I think that we are all aware of political difficulties of implementing such reforms, particularly the countries which were also under adjustment programs. We know how often it is very difficult to have this political consensus which isn't always possible. We know how painful that can be, especially for the population having the results of these policies with undesired results or sort of collateral effects. We know that this is difficult and we do appreciate the difficulties that Greece has, but that doesn't change the fundamental fact that there are a number of rules that apply to everyone, and what Eurogroup can do is try to help and make the process easier if possible. But the process is still necessary.

JC: Are the Greeks alienating countries like you, ministers like you, by suggesting that in such a way you caved to pressure, you bowed down at the expense of your population, whereas they won't do that.

MA: Uh, well we don't think that the criticism is fair because when you look at Portuguese position now, the program has been completed for about a year, and our prospects going forward are clearly much more positive than they were a year ago, and there's a huge difference from the situation that we found in June 2011 when the program started. So there is, there is plenty of evidence that many of the difficult policies were appropriate and that they provided the desired results. Maybe if we were t design things again some things would be changed, but that is inevitable with hindsight you would always make different decisions. But overall, when we look at the core of the program and the objectives that the program had, we can say it has been successful.

JC: Numerous say that we're as close to a Grexit as we've ever been. Is that alarmist or can you see significant risks here?

MA: There are risks. There are risks even of accidents happening, but again there is not that much that we feel that we can do at this stage, at least that's my perception, because it's uh – there's openness to discuss with the Greek authorities on the basis of commitments that they should put forward, and there's still no agreement on what those commitments could look like.

JC: Is the Eurogroup prepared for Greece to leave the Eurozone, for them not being willing to come to the table here?

MA: I don't think there is any real preparation one can do for such an event, in the sense that it has never happened before. So, there's, there are consequences which could be, um, unpredictable and if you ask me if I worry, of course I worry, and I think that we would all strongly prefer Greece to continue to be a Eurozone member. But again, it's in their hands.

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