September 22, 2020

Borrowing Costs Rise for Portugal Despite Deal on Bailout

The auction, which raised €1.1 billion, or $1.6 billion, came hours after José Sócrates, the caretaker prime minister, announced that he had agreed to terms for a loan package of €78 billion from the European Union and the International Monetary Fund.

The exact terms of the deal, outlined in a nationally televised speech late Tuesday, were expected to be officially confirmed Thursday and only after further talks between the creditors and the center-right Portuguese opposition parties Wednesday.

Mr. Sócrates resigned in March after Parliament refused to endorse his proposals for additional austerity measures. To break the political deadlock, Portugal is set to hold a general election June 5.

But in the meantime, the caretaker government officially asked for assistance last month after the government had failed to meet its 2010 deficit target and investors had sent borrowing costs to record high levels. Those developments heightened concerns about its ability to meet refinancing obligations.

Officials from the I.M.F., the European Commission and the European Central Bank then went to Lisbon to discuss an aid package that would allow Portugal to receive E.U.-led rescue funding by June, the month when it is to face its toughest refinancing hurdles this year.

Underlining Portugal’s economic difficulties, the I.M.F. also forecast last month that the Portuguese economy would contract 1.5 percent this year and 0.5 percent in 2012, which would add up to one of the most protracted downturns in all of Europe.

On Tuesday, Mr. Sócrates, who is negotiating while campaigning for the June 5 election, suggested that Portugal had negotiated better terms for its bailout than those accepted last year by Greece and Ireland. He highlighted creditors’ agreement to give Portugal more time to cut its budget deficit than his government had initially foreseen. He also described the outcome of the negotiations as “a good deal that defends Portugal.”

In the absence of more details about the aid program, however, some analysts poured cold water on his characterization. Also, with the election ahead, the center-right opposition parties are unlikely to want Mr. Sócrates to reap political benefit from negotiating a bailout for which they blame his government in the first place.

Gilles Moec, a fixed-income analyst at Deutsche Bank, said in a research note, “Sócrates may have gone too fast in going public on the package, sidelining the opposition and spinning his role in the negotiations as a protector of his electoral base.”

He added: “It could create a volatile news flow in the coming few days and also create the possibility of some re- negotiation of the package after the elections.”

On Wednesday, Portugal sold three-month Treasury bills at an average yield of 4.65 percent, the country’s debt management agency said. That was higher than the 4.05 percent yield when Portugal last sold such bills April 20. The auction attracted bids for 1.9 times the amount offered, compared with a bid-to-cover ratio of 2 two weeks earlier.

Chiara Cremonesi, a fixed-income analyst at the Italian bank UniCredit, said that the auction had gone well, given that the rise in the cost of financing was below the level on the secondary market.

Still, she urged caution, adding, “Portugal will not be immune over the next months from market pressure, given it still has to convince markets that it has a credible growth strategy and given that the debate of a Greek debt restructuring will continue.”

Meanwhile, Finland moved closer Wednesday to potential support for Portugal’s rescue package, as the biggest party in the Finnish Parliament decided to separate euro rescue negotiations from its talks on forming a coalition government with the True Finns, a party critical of euro-zone bailouts that won 19 percent of the vote in an election last month.

The arrangement could allow Finland to decide on whether to support further euro rescue packages before a meeting of E.U. finance ministers May 16, as well as before the formation of a new Finnish coalition government.

Some analysts expressed surprise Wednesday that Portugal had apparently managed to negotiate a slower deficit-cutting timetable than initially envisaged, as well as terms that might allow it simply to roll over outstanding money-market securities to cover its financing needs next year. The negotiations in Portugal, however, come amid heightened concerns that Greece will soon have to restructure its debt, despite having received emergency funding last year. Greece secured a bailout package worth €110 billion, and Ireland one worth €85 billion.

Under the three-year plan negotiated between the government and creditors, Portugal will need to cut its budget deficit to 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013. That is a slower schedule than that pledged by the government in March, when it said that it aimed for a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013. Ralph Solveen, a Commerzbank economist, said that “the relatively moderate conditions of the program indicate that the E.U. and the I.M.F. would also be prepared to show an accommodating stance toward Greece and Ireland with regard to the comparatively harsh terms of their financial aid programs if need be.”The €78 billion package was in line with estimates made last month by senior E.U. officials of what Portugal would require. Analysts estimate that about €12 billion of that money will be channeled toward the banking sector.

“The size of the package signals the determination of the E.U. authorities to ring-fence problems in the periphery, especially given the elevated market concerns about Greece and subsequent contagion risks that could arise from that,” Barclays Capital said in a research note Wednesday.

Article source: http://www.nytimes.com/2011/05/05/business/global/05portugal.html?partner=rss&emc=rss

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