Bloomberg News

Passos Coelho Wants Portugal to Return to Markets Faster

June 16, 2011

(Updates with Passos Coelho comment in second paragraph.)

June 16 (Bloomberg) -- Pedro Passos Coelho, Portugal’s incoming Social Democratic premier, said he wants his country to return to markets for funding in two years or less after it requested a 78 billion-euro ($110 billion) bailout in April.

“We will need to return to the market in two years,” Passos Coelho told reporters in Lisbon today. “We’ll do everything so that return to the market will be even faster. We will have to be very diligent in meeting the agreement that was signed with the European Union and the International Monetary Fund. But we will also have to surprise.”

Passos Coelho spoke after the Social Democrats and the People’s Party today signed an agreement to form a coalition government following June 5 elections that gave the two parties combined a majority of seats in parliament. Passos Coelho’s Social Democrats defeated the Socialist Party of outgoing Prime Minister Jose Socrates in the vote.

The coalition government will have to implement an austerity plan that was a condition of the financial aid package from the EU and the IMF. With the country’s debt and borrowing costs surging, Portugal followed Greece and Ireland in April in seeking a rescue.

Borrowing Costs Rise

The aid will allow Portugal to avoid having to raise funds in bond markets for two years, Poul Thomsen, head of the IMF mission in Portugal, said on May 5. Socrates’s minority government fell in March, leading to the early elections, after lawmakers rejected his proposed deficit-cutting plan as he struggled to avoid a bailout.

Borrowing costs have increased since Portugal requested aid. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds reached a euro- era record of more than 800 basis points today, up from 511 basis points when Socrates sought the bailout on April 6. The 10-year bond yield reached 10.97 percent today and the five-year yield rose as high as 12.63 percent, also the highest levels since the euro was adopted in 2000.

The yield on Greece’s 2-year bond topped 30 percent for the first time today on concerns Greek Prime Minister George Papandreou’s grip on power was slipping, threatening passage of a new austerity plan aimed at securing a second aid package and avoiding the euro region’s first default. Papandreou decided to reshuffle his Cabinet and demand his allies vote confidence in his government.

Bill Auction

Yesterday, Portugal auctioned 1 billion euros of six-month and three-month bills. The securities due in December were issued at an average yield of 4.954 percent, less than the 5.529 percent at the previous auction on April 20. The bills due in September were sold at an average 4.863 percent, compared with 4.967 percent at the previous auction on June 1.

Portugal’s new government will have to carry out various measures by the end of July, including the sale of failed lender Banco Portugues de Negocios SA and the elimination of all “golden shares” or other special rights held by the state in publicly traded companies. It will also have to propose a law on reducing severance payments and present a plan to cut employers’ social security contributions.

The three-year aid plan set goals for a budget deficit of 5.9 percent of GDP this year, 4.5 percent in 2012 and 3 percent in 2013. The country had the fourth-biggest gap in the 17- country euro region last year at 9.1 percent of GDP.

Portugal’s public debt swelled to 93 percent of GDP in 2010 from 68 percent in 2007. The European Commission forecasts Portugal’s debt will increase to 101.7 percent this year and 107.4 percent in 2012. The debt ratio will start declining from 2013, according to outgoing Finance Minister Fernando Teixeira dos Santos.

Teixeira dos Santos said on May 5 the economy will shrink 2 percent this year, twice as much as he previously forecast, as further austerity measures are implemented. GDP will also decline 2 percent in 2012, he said. Portugal’s economic growth has averaged less than 1 percent a year in the past decade, one of Europe’s weakest rates.

--Editors: Jim Silver, Eddie Buckle.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net.

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net.


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