Portugal’s successful return to the financial markets

The Portuguese Treasury is expected to successfully issue EUR2.5bn worth of 5-year Government bonds at an average rate below 5% this afternoon. The demand for these bonds, according to the most recent estimate that excludes the US market, was 10bn. The operation was syndicated, which means that the Government hired the support of a syndicate of banks, on this occasion Banco Espírito Santo, Deutsche Bank, Morgan Stanley and Barclays.

This operation marks the beginning of a gradual return to the financial markets, though the Portuguese Treasury has been testing waters over the last few months with 18-months’ T-bills issuance and an exchange programme late last year. The operation is being considered a success by most analysts which suggests that, barring any bad news on the European front or a significant slippage in the Portuguese Adjustment programme, it is likely to contribute to lowering the Government’s financing costs in the next few months. At the same time, the Government has asked to Eurogroup that Portugal’s official lenders extend their loans’ maturities.

Macrometria’s take: On balance, these are good news as they should contribute to increasing the sustainability of the Portuguese Government debt, which depends on the primary surplus, interest payments and GDP growth. In turn, this could lead to a revaluation of Portuguese Sovereign debt by rating agencies, that may remove the negative outlook currently in place. Furthermore, like Ireland is likely to do, today’s operation should make Portugal eligible to access the ECB´s programme of Government debt buying called Outright Monetary Transactions (OMT), which could further lower financing costs for the Public Sector. Today could mark the beginning of a virtuous (if slow) cycle.

However, several risks remain. First and foremost, today’s success is at least partly due to an increased appetite for European Bonds and for risk, which could disappear very quickly if there are bad news on the economic growth front. In that respect, the IMF’s most recent forecast of a sharper than expected slowdown in the world in 2013 and a recession in the Eurozone are worrisome. Second, though Portugal’s efforts to adjust are commendable and the results in some areas (most notably the external balance) surpass expectations, many risks remain. We are particularly concerned about the lack of access to finance by most Portuguese firms, which may hinder the recovery late in 2013.