By CHRIS GRAEME chris.graeme@theresidentgroup.com
The threat of the imminent arrival of the International Monetary Fund in Portugal receded temporarily last week following Wednesday’s successful government bond auction.
The first sovereign debt auction of the year attracted an 80% interest from foreign buyers, including allegedly the Chinese and some Middle Eastern countries, and was oversubscribed by three times the actual number of bonds available.
The auction, which was trumpeted as a success by both the Finance Minister Fernando Teixeira dos Santos and the Prime Minister José Sócrates, managed to raise a target of €1.25 billion in borrowing needed to finance the day-to-day running of the State and repay the interest in existing bond loans
In all, Portugal needs to find over €40 billion in borrowing just to stand still and keep abreast of its borrowing commitments and this first auction of debt, while no doubt a modest success, was just a drop in the ocean.
The Government has also been trumpeting the fact that it has managed to meet European Union Stability & Growth Pact (PEC III) Government debt rates, bringing it down to the 7.4% forecast in 2010.
However, critics have suggested that this was merely done by the sudden influx of cash from moving the Portugal Telecom pension fund to State control.
The bonds sold at auction on January 12 were medium (four years)
and long-term ones (ten years) maturing in 2014 and 2010 respectively.
The success of the auction prompted the Finance Minister to state that “the success of today’s issue shows that Portugal has all the necessary conditions to finance itself in the market at prices that are not only acceptable but favourable given the current economic climate”.
“The demand corresponded to triple the supply, which translates into a fairly higher level in terms of average demand than in 2010 and previous years,” he told Reuters agency.
“We have all the conditions to independently meet the challenges ahead of us and we see no reason to abandon the financing strategy we have been pursing in the market based on diversifying our investor base,” he stressed.
But, at that same time, the European Commission and its European Bailout Fund has been preparing a credit line for Portugal worth €100 billion.
The news appeared in the German Financial Times (FT Deutschland) which quoted anonymous EU sources.
According to the newspaper, quoted by Bloomberg, the help could be rapidly supplied if Portugal had done badly on Wednesday’s bond auction which raised the capital in the secondary market at interest rates of 5.577% and 6.879% respectively for four and 10 year bonds.
Analysts interviewed last week by Portuguese business dailies following the auction generally believed that Portugal would be able to pass “its test of fire” which was echoed by the European Central Bank which again began buying Portuguese national debt.
However, some economists and analysts have warned that despite the success of the auction, the interest rates are still unsustainable long-term for a country whose public debt is high and rising.
They believe that unless borrowing costs fall this year, Portugal will sooner rather than later have to seek a bailout from the IMF and EU in the same way that Greece and Ireland had done before it.
The Prime Minister, who was in Qatar this weekend to drum up business contacts and discuss opening an embassy, denied that the purpose of his visit was to persuade the Arabs to buy up more Portuguese sovereign debt.
But debt and bond emissions aside, Portugal’s fundamental problems remain: the loss of wage competitiveness, the inflexibility of its labour laws and market, an average budget deficit over the past decade of 4.6% of GDP and a net private, consumer and foreign debt at over 100% of GDP.
Only a radical and serious overhaul of hard-won labour concessions following the 1974 Revolution can buck that trend and that could result in a dangerous and destabilising social revolution itself.
