After being virtually shut out of government bond markets during a 2011 to 2014 bailout programme, Portugal is steadily re-establishing itself as an attractive market for international investors, according to Cristina Casalinho, chief executive of Portugal’s public debt management agency, the IGCP.
“We are now much more aligned with what is happening in other peripheral markets such as Italy and Spain,” she says. “We have been enlarging our investor base internationally and slowly increasing the participation of ‘real money investors’ [fund managers and non-financial domestic investors].”
Spanish, Scandinavian and German investment in Portuguese debt has increased significantly over the past three years, she adds, saying: “The level of awareness has increased and we’re starting to see inquiries from Asian investors. Investors have resumed seeing Portugal as a ‘normal’ market.”
This return to normality has been achieved despite considerable handicaps. Portuguese debt is rated as below investment grade by every leading agency except Canada’s DBRS. “This significantly affects the ability of asset managers to deploy the same volume of funds that they might invest in markets with more solid ratings,” says Ms Casalinho.
Handover of power
Portugal has also undergone sweeping political change since Ms Casalinho was appointed head of the IGCP in October 2014. A centre-right government was replaced in late 2015 by a minority Socialist Party administration supported in parliament by three smaller left-wing parties, all of whom have voiced their determination to move away from austerity.
Doubts over the Socialists’ capacity to maintain financial discipline and generate the level of growth needed to sustain public debt in excess of 130% of gross domestic product have pushed up yields on Portugal’s benchmark 10-year debt to above 3%, compared, for example, with 0.5% for Ireland.
Yields would inevitably climb higher still without the backing of the European Central Bank’s (ECB's) bond-buying programme, of which Portugal has been a leading beneficiary. If DBRS were to downgrade Portugal, Lisbon would no longer be eligible for ECB support. Ms Casalinho, however, sees little likelihood of this happening. “DBRS is likely to remain comfortable with its current rating as long as Portugal stays committed, as it does, to complying with the EU’s fiscal rules,” she says.
Ms Casalinho, who was chief economist at Portugal’s Banco BPI for nine years before moving to the IGCP, is focusing on what she sees as the three pillars of Portugal’s funding strategy: “pre-financing, smoothing the redemption curve and enlarging our investor base.”
Held in reserve
This year, the IGCP aims to raise €6.5bn to pre-finance 2017’s estimated total government borrowing requirement of €15bn, creating a cash buffer that, should the need arise, would see the country through about six months of market turbulence.
The agency, says Ms Casalinho, uses these cash reserves partly to iron out bumps in Portugal’s bond redemption timetable. This helps build defences against market pressures by rendering the country less susceptible to repayment peaks at vulnerable moments.
“We have been easing quite a challenging profile of debt redemptions by reducing the peaks and spreading them out over time,” she says. “As a result, we have increased the average maturity of our debt stock to eight-and-a-half years. That compares favourably with the standard average maturity for most other European issuers.”
Maturities have been extended by exchange operations and buybacks of shorter dated bonds, replacing them with debt of longer maturities. This year the IGCP has invested almost €4.6bn in buying back bonds (including repurchases of International Monetary Fund loans) maturing between 2016 and 2019. In July, it also successfully exchanged €1bn of one- to three-year debt for bonds maturing in 2025 and 2037.
Early repayment of IMF loans has also helped cut debt servicing costs. The fund accounted for about one-third of the €78bn bailout Portugal received from the EU and IMF in 2011. But interest rates on the IMF tranche are higher than on the EU portion and than current market rates. So far the IGCP has prepaid €10.4bn of the IMF loan and had planned to repurchase a further €6.6bn this year.
Be prepared
However, pre-payments to the IMF are likely to be cut to about €2bn this year to enable the government to inject €2.7bn into state-owned Caixa Geral de Depósitos, Portugal’s largest bank, and to allow for a shortfall in the €4bn due to be raised by the government from the sale of financial assets, including Novo Banco, the so-called ‘good bank’ salvaged from the collapse of Banco Espírito Santo.
The flexibility introduced into Portugal’s funding strategy through pre-financing and a smoother redemption curve means that unforeseen events such as these can be accommodated without affecting the country’s debt issuance programme, says Ms Casalinho.
However, the task of gradually whittling down Portugal’s massive stock of debt remains a daunting challenge. As Ms Casalinho puts it: “We have considerably improved the debt flow problem, but the problem of trimming the debt pile remains very significant.”
