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Spectre of IMF haunting Portugal

By CHRIS GRAEME [email protected]

The possibility that Portugal could be the next country to be pressured into accepting a bail-out from the International Monetary Fund gathered pace over the weekend.

Despite Government assurances to the contrary, yields on Portuguese 10-year treasury bonds once again soared, to over seven per cent, while insurance on debt default or credit default swaps shot up 29.9 per cent to 447 base points.

Portugal’s Finance Minister Fernando Teixeira dos Santos has been inconsistent in his evaluation of Portugal’s situation.

On November 22 he said that Portugal, unlike Ireland, had a “modern, sophisticated, well regulated and supervised banking system” which was “resilient and well capitalised”.

Echoing the words of President Cavaco Silva, he also stressed that Portugal had “never had a property bubble” while the country’s budget deficit was “in line with the European Union average”.

Yet, earlier in the month, he had admitted that Portugal might eventually need to ask the IMF for help.

Over the weekend, Portugal did not ask for that outside help at the meeting of Euro Zone finance ministers in Brussels which approved an €85 billion rescue plan for Ireland.

“The Portuguese Minister of Finance has today informed us of the situation and the measures that are to be taken and stated that Portugal sees no necessity to seek help (from the IMF),” said German Finance Minister Wolfgang Schäuble during a press conference at which Fernando Teixeira dos Santos refused to make any commentaries.

It was also reported over the weekend in Portuguese newspapers that the Government is now prepared to reform Portugal’s inflexible and strict labour laws – one of the stumbling blocks which the IMF believes stands in the way of company competitiveness and productivity.   

However, assurances given by both Prime Minister José Sócrates and Teixeira dos Santos have nothing to calm the markets which believe that Portugal and Spain will be the next to seek help from the IMF.

One financial market analyst, Emanuel Reis Leão, explained to business daily Jornal de Negócios last week that “the financial markets had a limited capacity to process information” and that now that Ireland has accepted an IMF bailout “the markets could turn their attentions to Portugal”.

The problem is that although Portugal has a banking system that is in much better shape than Ireland’s, its external balance of payment deficit and prospects for future economic growth are in a worse shape.

“If the markets don’t believe that Portugal is in better shape than Ireland then the IMF may have to intervene,” he said.

Jean Claude Juncker, President of Eurogroup, said he believed that the Portuguese banking system was healthy while the European Commission’s Olli Rehn stressed that Portugal’s problems were different from Ireland’s and that Portugal had taken “very courageous measures with regards to budgetary consolidation”.

The differences between Ireland and Portugal

Ireland is in a much weaker position than Portugal on analysis of its assets, which are in foreign hands. All told around 1,000 per cent of its GDP is held by non-resident investors. In Portugal that ratio stands at 250 per cent.

Portugal is more dependent on foreign financing and investment. Despite having an overall smaller deficit than Ireland, every year it borrows the equivalent of one-tenth of its annual production to finance its spending. Borrowing from the State (treasury bonds), the banks (the international money markets) families and companies resulted in a balance of payments deficit running at -9.2 per cent against Ireland’s -1.2 per cent.

Ireland’s banking sector is in a worse shape than Portugal’s with Ireland having to get financing from the European Central Bank to prevent its banks collapsing. Irish banks have already asked the ECB for 40 per cent of its GDP in loans. Portuguese banks, too, have borrowed money from the ECB but that figure represents 24 per cent of GDP. In addition, Portuguese banks have managed to cover most of their loans having lent more sensibly and with less leverage than Irish banks. Consequently, they have suffered fewer defaults from risky loans, did not get involved in the sub-prime market and have more liquidity.

Portugal is under more pressure than Ireland with regards to the need to pay back debts contracted in the past. This is because investors perceive Ireland as more competitive and productive and more likely to bounce back from current difficulties. In April and June, for example, Portugal had to pay back €9.6 billion in long-term debt. Ireland, on the other hand, only had some short-term debt to pay off. In the first half of 2010 Portugal’s public debt repayment stood at €19 billion Euros whereas Ireland’s was €6 billion.

The International Monetary Fund believes that Portugal’s economic growth (1.2 per cent) rates will remain less than Ireland’s (2.5 per cent) once the recession ends. Poor growth rates mean that the State will have problems collecting taxes and reducing expenditure while the private sector too will remain weak and unproductive.

The interest rates (yields) paid on 10-year sovereign bonds (public debt) to investors has soared in Portugal to over seven per cent. Ireland’s is higher at 8.09 per cent.

The cost of taking out debt default insurance (credit default swaps) on Portuguese debt has skyrocketed 29.5 base points to 447 base points. This is because the markets think that Portugal is more likely to default on its loan repayments.

Unlike Ireland and Spain, Portugal did not suffer a bursting property bubble from reckless lending and speculation. Ireland’s banks are in a bad state precisely because they lent huge amounts of cheap money to satisfy avid property buyers. This artificially pushed up the prices of property which eventually crashed down in value leaving hundreds of thousands in negative equity and many unable to meet their mortgage payments.

Do you have a view on this story? Please email Editor Inês Lopes at [email protected]
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