Pedro Passos Coelho, Portugal's prime minister, addresses his nation on Tuesday
Portugal’s political wobble has raised anew questions about whether it will need a second bailout once its current €78bn rescue runs out in the middle of next year. With bond market borrowing costs hovering above 7 per cent – just below levels where Lisbon was forced into the rescue in April 2011 – a full return to market financing appears far less likely than it did just a few days ago.
What are the options if Portugal can’t make it? Back in February, when eurozone finance ministers were weighing whether to give both Ireland and Portugal more time to pay off their bailout loans, EU officials drew up a memo that included a section titled “Options beyond the current programmes and the role of the ESM”.
Although it’s over four months old, it hasn’t been made public before and it offers some newly-relevant insights into what path Portugal may take if it can’t stand on its own by May 2014. Read more
Prime minister Pedro Passos Coelho addresses the nation Sunday on Portugal's faltering bailout.
Although Cyprus has pushed its way back into the news, the main event at Friday’s meeting of eurozone finance ministers in Dublin is expected to be a decision on whether to give Ireland and Portugal more time to pay off their EU bailout loans.
We at Brussels Blog got our hands on the 12-page options paper prepared for the ministers by the so-called “troika” of international lenders – European Commission, European Central Bank and International Monetary Fund – and staff of the eurozone’s €440bn bailout fund, and have posted it here. The document contains five different options: extend the payment schedule a few months; by 2.5 years; 5 years; 10 years or more; or a compromise of 7 years.
As we reported earlier in the week, the debate is now centred on the document’s recommended option, the 7-year extension plan, though there are still reservations in Berlin about moving forward.
Beyond the options themselves, however, the document contains a very revealing analysis on the state of Portugal’s €78bn bailout, which has recently suffered some setbacks. As one official who will participate in Friday’s meeting put it, the topic of Portugal will be “more exciting than would have been a week ago”.
Although the document doesn’t address it directly, it makes clear that Portugal will have a very hard time avoiding a second bailout, since its financing needs in 2014 and 2015 – its first years after bailout funding runs out in July 2014 – will be substantially higher than they were during the pre-crisis period. Read more
Finance ministers MIchael Noonan of Ireland, center, and Vito Gaspar of Portugal, right, with the EU's Olli Rehn at January's meeting.
After Greece last year won a restructuring of its €172bn rescue that included an extension of the time Athens has to pay off its bailout loans, Ireland and Portugal decided they should get a piece of the action, too.
So at the January meeting of EU finance ministers in Brussels, both Dublin and Lisbon made a formal request: they’d also like more time to pay off their bailout loans. According to a seven-page analysis prepared for EU finance ministry officials a few weeks ago, though, the prospect is not as straight forward as it may seem.
The document – obtained by the Brussels Blog under the condition that we not post it on the blog – makes pretty clear that while an extension might help smooth “redemption humps” that now exist for Ireland (lots of loans and bonds come due in 2019 and 2020) and Portugal (2016 and 2021), it’s not a slam dunk case. Read more
As we note in today’s dead-tree edition of the FT, the European Commission is out with its latest assessment of Portugal’s €78bn bailout. But buried in the report is a two-page box that raises the intriguing question of whether the bailout is actually bigger than leaders have disclosed.
In its small print, the box – soporifically titled “Euro Area and IMF Loans: Amounts, Terms and Conditions” – makes pretty clear that Portugal’s bailout will actually be closer to €82.2bn (we’ve posted the box here). Elsewhere, another table (posted here) says it’s actually €79.5bn.
Why the sudden increase? About €1.8bn of the rise is pretty straight forward. The International Monetary Fund, which is responsible for one-third of the total bailout funding, doesn’t pay its bailout aid in euros. Instead, it uses something called Special Drawing Rights, or SDRs, which have a value all of their own.
Because an SDR’s value fluctuates based on a weighted average of four currencies – the euro, the US dollar, the British pound and the Japanese yen – the 23.7bn in SDRs that was worth €26bn when the Portuguese bailout was agreed last year is now worth about €27.8bn, meaning Lisbon gets more cash just because of the currency markets.
The extra money from the EU is a little harder to explain. Read more
Passos Coelho with Britain's David Cameron during a visit to Downing Street on Wednesday
Largely overlooked amidst the handwringing over Spain this week was a piece written by Portuguese prime minister Pedro Passos Coelho in the FT that all but admits publicly what many officials have been saying privately for some time: Portugal is probably going to need a second bailout.
In fairness, Passos Coelho doesn’t actually come out and say that, but it sure sounds like he’s preparing the groundwork:
We are utterly committed to fulfilling our obligations. But while we are optimistic, we must also be realistic and pragmatic. This is why we accept that we may need to rely on the commitment of our international partners to extend further support if circumstances beyond our control obstruct our return to market financing.
Although Portugal’s current €78bn bailout runs through 2014, a decision on whether a second bailout is needed must be made much more quickly than that – probably sometime in the next two or three months. A look at why after the jump… Read more
Portuguese prime minister Pedro Passos Coelho arriving at Monday's EU summit in Brussels
As financial markets watch with nervous anticipation the outcome of the tense negotiations over Greece’s debt restructuring, there is clear evidence that bond investors believe Portugal could be next, despite repeated insistence by European leaders that Greece is “an exceptional and unique case” – a stance reiterated at Monday’s summit.
Portugal’s benchmark 10-year bonds were over 17.3 per cent this week, though things have eased off a bit today. Those are levels seen only by Greece and are a sign the markets don’t believe Lisbon will be able to return to the private markets when its bailout ends next year. Default, the thinking goes, then becomes inevitable.
But are Greece and Portugal really comparable? Portugal certainly shares more problems with Greece (slow growth, uncompetitive economy) than with Ireland and Spain (housing bubbles, bank collapses). But unlike Greece, where talk of an inevitable default was the topic of whispered gossip in Brussels’ corridors from almost the moment of its first €110bn bailout, there is no such buzz about Portugal.
More concretely, the latest report by the European Commission on the €78bn Portuguese bail-out, published just a couple weeks ago, paints a much different picture for Lisbon than for Athens. An in-depth look at the largely overlooked report after the jump… Read more
Portuguese prime minister Pedro Passos Coelho arriving at last month's EU summit
Financial markets today have been whipsawed yet again by data showing the one bright spot on the eurozone’s economic horizon – the German growth engine – may be faltering. But Eurostat’s quarterly report on the currency region’s economic health did have at least one unexpected positive surprise, too: Portugal.
Yes, Lisbon may be beginning a wrenching austerity programme, agreed as part of its €78bn bail-out. And yes, the country’s bonds suffered recent downgrades because debt analysts do not think Lisbon will be able hit the bail-out’s debt and deficit targets.
But during the second quarter of the year, the Portuguese economy was flat – a significant improvement after two quarters of 0.6 per cent shrinkage, and much better than the 1.1 per cent decrease that analysts predicted. Read more
Enda Kenny, the Irish prime minister
Although the crisis summit is focused on Greece, there are signs that Portugal and Ireland may benefit from today’s deal, too. According to a senior European official, leaders are close to an agreement that would see lending rates on Lisbon’s and Dublin’s bail-out loans be cut – though no word on how much.
Currently, Portugal and Greece pay 200 basis points above the borrowing costs of the eurozone’s €440bn bail-out fund, while Ireland – because of an arcane dispute with France over corporate tax rates – still pays 300 basis points. There’s been some talk that this could be lowered to as little as 50 basis points for all three, but our source was mum on that point. Read more
If the Greek crisis has taught us anything over the past few weeks it’s that going from a bail-out back into the financial markets is hard, and any rescue programme should be very conservative when it comes to estimating how much private-sector borrowing a bailed-out country will be able to do.
The recent scare occurred because a Greek gap opened in March 2012, when the original €110bn bail-out programme envisioned Athens dipping back into the bond market. Everyone now acknowledges this is impossible, particularly with 10-year Greek bonds still over 16 per cent, despite Wednesday’s rally driven by the successful Greek parliamentary vote on austerity measures.
As our friends and rivals at the Wall Street Journal have pointed out, detailed reports on Ireland show its programme has become much more conservative, with only about €3.4bn in private-sector borrowing called for in 2012 (originally it was €12.3bn; Greece was supposed to raise €15.9bn in the first quarter of 2012 alone). Read on for our first look at Portugal’s financing assumptions. Read more
Portugal is to get a €78bn ($116bn) bail-out from the European Union and the International Monetary Fund, the third eurozone country to receive emergency external funding. Lex’s John Authers and Vincent Boland discuss if it’s enough to resolve the country’s longer-term economic problems. Read more
Political junkies throughout Europe will, for one weekend at least, take their eyes away from the ongoing turbulence in Portugal and shift 3,500km to the northeast, where Finnish voters go to the polls on Sunday in what has become one of the most interesting national elections since the outbreak of the eurozone crisis.
As we’ve chronicled in the FT for several months, the once safely pro-EU Scandinavian country has seen an incredible surge in support for the populist True Finns party, which has run on an avowedly anti-euro and “no more bail-outs” platform. A victory for the party, led by MEP Timo Soini, could throw a huge wrench into EU efforts to rescue Portugal.
The final opinion poll going into Sunday’s vote shows True Finns support slipping a bit, however. Last month, a TNS Gallup poll put them in second place at 18.3 per cent, just 2 percentage points behind the front-running centre-right National Coalition party. The latest TNS Gallup survey had them at just 16.9 per cent, however, and a survey issued Thursday by public broadcaster YLE put Soini back in fourth with just 15.4 per cent. Read more
Portugal will be asked to implement sweeping austerity measures and conduct a major privatisation programme when negotiations begin next week to hammer out a likely €80bn bailout package with the European Union and International Monetary Fund. Read more
Another eurozone country has been humbled by its banks. Earlier this week, Portugal’s banks were threatening a bond-buyers’ go-slow unless the caretaker government sought financial help from other European Union countries. After being beaten up in Wednesday’s debt auction, Lisbon has waved the white flag. The country’s caretaker leaders have now admitted that Portugal will need outside help. Read more
With most of the work on the so-called “grand bargain” completed at last week’s European Union summit, all eyes will now focus on Portugal and whether it can make it until expected elections in May or June without resorting to a bail-out.
A new research note by Giles Moec, the head of European economic research at Deutsche Bank, nicely encapsulates the stakes facing Lisbon and summarises much of what we were hearing on the sidelines of last week’s summit – namely, that it would be in Portugal’s interest to take a bail-out, but the political turmoil may make it impossible.
As Moec notes, the date to watch is April 15, when the Portuguese government has about €4.3bn in outstanding debt it must refinance. With Portugal’s 10-year bonds hitting another euro-era high of 7.9 per cent on Monday – well above the 7 per cent the government has said it can handle – that April deadline is looking rather expensive. Read more
Portugal’s prime minister has resigned on the eve of a European Union summit that is supposed to move towards a “grand bargain” to bolster the eurozone and strengthen its crisis prevention ability. The currency bloc is in a bind. Lex’s Edward Hadas and Vincent Boland discuss just how bad it is and what might come next. Read more
The Liberal Democrats chose the elegant Palais D’Egmont for their pre-summit gathering. While the leafy grounds are gorgeous – particularly on a very un-Belgian sunny day – the mood was anxious. Read more
Until Portugal imploded, most of the focus of the two-day summit was expexted to be on the new Irish prime minister Enda Kenny, who failed to secure a cut in Dublin’s bail-out loans during an emegency gathering two weeks ago. Read more
The pre-summit caucuses of leaders in their party groupings have begun, and one of the surprise guests at the centre-right European Peoples’ Party meeting is Pedro Passos Coelho, the head of Portugal’s opposition Social Democrats and the country’s likely next prime minister. Read more
The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently. The argument goes as follows: euro weakness = more European exports = higher European economic growth.
Unfortunately, the real world is not as simple as that. Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets. As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates. These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. Read more
For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues. (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)
The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn. This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product. It is far higher than previous published estimates. It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. Read more