Bloomberg News

Portugal Plans to Issue Medium-Term Notes, Bills, IMF Says

July 17, 2012

Portugal plans to issue medium-term notes with maturities of one to five years that are designed for specific creditors as it seeks to regain access to bond markets, the International Monetary Fund said.

The government is also expected to sell more treasury bills with maturities of more than one year in the coming months, the IMF said in a staff report on the fourth review of the aid program for Portugal. The government debt agency sold 1 billion euros ($1.2 billion) of 18-month bills on April 4, the longest debt maturity auctioned since the country requested the bailout, at an average yield of 4.537 percent.

“Market access next year will depend on sustained program implementation and the attenuation of the financial tensions in the euro area,” the Washington-based lender said. “The broader euro-area crisis generates persistent risks of contagion and uncertainty about regional policies that could hinder restoration of investor confidence.”

Portugal is cutting spending and raising taxes as it tries to comply with the terms of its 78 billion-euro rescue from the European Union and the IMF. Prime Minister Pedro Passos Coelho said on March 5 that if the country can’t tap bond markets by September 2013 due to “external reasons,” it would be able to count on continued support from the IMF and the EU.

Market Access

“Staff considers that market access can be regained within the period that fund resources are outstanding, but risk remains of delay in market access,” the IMF report said. “It was agreed that the commitment of European leaders to provide adequate financial support until market access is regained, as long as performance under the program remains satisfactory, is an important safety net.”

An official at the Finance Ministry in Lisbon declined to comment on plans to issue medium-term notes.

“The fact that it is being done in a medium-term note suggests that they might have a specific client or investor lined up,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Portuguese yields will continue to be driven by wider euro-zone issues.”

Portugal’s 10-year bond yield is now at about 10.4 percent, while two-year debt yields 7.6 percent. The difference in yield that investors demand to hold Portugal’s 10-year bonds instead of German bunds has narrowed to 9.2 percentage points from 16 percentage points on Jan. 31.

‘Elevated’ Spreads

“Secondary market spreads on Portuguese long-term bonds, while markedly lower than the levels observed earlier this year, are still elevated, reflecting concerns about the high level of indebtedness of both the public and private sectors as well as scepticism about the effectiveness of policies at the euro-area level,” the IMF said.

A significant worsening of the situation in Spain or Greece and in the euro area could have “important repercussions” on the financial sector, the report said. “The importance of showing that the increase in public debt has been arrested cannot be overstated as Portugal looks to return to the market next year.”

The IMF projects Portugal’s debt will peak at about 118.5 percent of gross domestic product in 2013 and decline to less than 80 percent of GDP by 2030. The projection assumes annual economic growth of 2 percent and medium and long-term borrowing costs of 7 percent in 2013, declining gradually to 5 percent over the next four years.

Adjustment Possible

The IMF said the 2012 budget deficit goal of 4.5 percent of GDP remains within reach, “although risks to its attainment have clearly increased in recent months.” It said the target could be adjusted.

“Should the target become difficult to reach as a result of weaker revenue performance than currently assumed, there would be a good case to allow automatic stabilizers to operate and adjust the target,” the IMF said.

The Finance Ministry said June 22 the government deficit widened in the first five months of the year after tax revenue was lower than forecast. The government estimates GDP will contract 3 percent this year. Economic growth has averaged less than 1 percent a year for the past decade, placing Portugal among Europe’s weakest performers.

The next review of the country’s aid program, which is scheduled to start on Aug. 28, will focus on the planned return to bond markets in 2013, Coelho said on June 29. The IMF yesterday said it approved a disbursement to Portugal of about 1.5 billion euros.

The Portuguese government will consider the possibility of cutting employers’ social-security contribution rates as it prepares the 2013 budget, the IMF said today. A new round of stress tests on banks will also be completed before the next review, it said.

The Finance Ministry said in June that the state will inject more than 6.6 billion euros into Banco Comercial Portugues SA (BCP), Banco BPI SA (BPI) and Caixa Geral de Depositos SA to help the lenders meet capital requirements. Portuguese banks can use a 12 billion-euro recapitalization facility that’s part of the financial aid program.

To contact the reporter on this story: Joao Lima in Lisbon at jlima1@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net


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