Bloomberg News

Portugal Town Halls Face Default Amid $12 Billion Debt

March 23, 2012

Portugal last year became the third euro-area country to request external aid, following Greece and Ireland. Photographer: Mario Proenca/Bloomberg

Portugal last year became the third euro-area country to request external aid, following Greece and Ireland. Photographer: Mario Proenca/Bloomberg

Portugal’s town halls face default amid 9 billion euros ($12 billion) of debt unless the government provides aid soon, said Fernando Ruas, president of the nation’s association of municipalities.

“At a company we call it insolvency,” Ruas said in a telephone interview from Lisbon on March 21. “It could happen that some town halls could have to restructure their debt if the government doesn’t intervene.”

Ruas blamed a decline in money transfers from the government in Lisbon to municipalities for their growing financial woes. Portugal last year became the third euro-area country to request external aid, following Greece and Ireland. Prime Minister Pedro Passos Coelho is cutting spending and raising taxes to meet the terms of the 78 billion-euro rescue.

“A sharp decrease in money transfers has made it harder for many town halls to comply with their ongoing commitments,” said Ruas. His association estimates town halls face about 9 billion euros in liabilities. About 1.5 billion euros of the total is in bills to suppliers overdue by more than 90 days while the remainder is mostly made up of debt to banks, he said.

Similar to Spain

The southern European country’s 308 town halls and two semi-autonomous regions face similar issues to those of Spain, whose regions and municipalities have been shut out of capital markets due to the credit squeeze, leaving many bills to suppliers unpaid. Spain’s government is offering them loans to help pay suppliers.

Money-transfers from the central government to town halls are set to decline 4.7 percent this year to 2.28 billion euros from a year earlier, according to Portugal’s 2012 budget. To cut costs, Portugal is encouraging some town halls to merge as part of a plan to re-organize local governments, the government said in a statement on Feb. 2.

“The high level of indebtedness of town halls across the country is nothing new,” said Joao Cesar das Neves, a professor of economics at Lisbon’s Catholic University. “The government had little control over the country’s municipalities, which spent way beyond what is admissible, and now it is faced with a complicated problem.”

Number Crunching

The government is currently obtaining more data on municipal finances, a spokesman for Parliamentary Affairs Minister Miguel Relvas said. “The information already made public shows that there are some town halls facing financial difficulties,” Antonio Vale said by phone.

Portugal’s island of Madeira said last year that its debt had risen to an unsustainable 6.3 billion euros, prompting the government in Lisbon to grant the semi-autonomous region 1.5 billion euros in aid in exchange for a pledge to increase taxes and cut spending.

Asked if the government may aid some cities and towns in a similar fashion, Vale said: “This is a different situation than Madeira.” He declined to provide details on possible solutions being considered by the government.

Portugal’s shrinking economy may make further help harder to come by. Gross domestic product declined for a fifth quarter in the three months through December and the jobless rate rose to 14 percent. That may hurt efforts to cut the budget deficit to 4.5 percent of GDP this year and within the European Union’s 3 percent limit in 2013.

Banking Woes

Town halls may also find it tougher to get bank funding as Portuguese lenders will probably have to cut back on lending to bolster capital ratios and comply with the terms of the nation’s bailout package, Andre Rodrigues, an analyst at Caixa Banco de Investimento in Lisbon, said last week.

“From a regulatory point of view, it still makes little sense to restart lending growth in the short term,” he said.

The rescue plan assumes Portugal will regain access to medium and long-term sovereign debt markets in 2013, with the program’s last disbursement to be made in June 2014, the International Monetary Fund said in December.

Passos Coelho said in an interview on March 6 that if the country is unable to return to markets next year due to external factors, it would be able to count on the support of the IMF, the European Commission and the European Central Bank.

Ruas said he met with government officials in recent weeks to discuss possible help for the debt-ridden municipalities.

“Nobody is expecting the government to forgive our debt,” he said. “I’m hopeful the government will find a solution that will help municipalities meet their obligations in terms of paying suppliers on time and meet their debt obligations.”

Still, not all town halls risk default or need aid, said Antonio Amaral, a spokesman for Maia, a northern city of 145,000 people. “Since 2006, we’ve cut our debt by 46 percent, and we have a very sustainable debt ratio at this moment, despite the crisis we are facing,” he said in an e-mail.

To contact the reporter on this story: Henrique Almeida in Lisbon at halmeida5@bloomberg.net

To contact the editors responsible for this story: Jerrold Colten at jcolten@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net


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