Portugal to follow Irish lead and exit bailout without credit line

Prime minister Pedro Passos Coelho says Lisbon has year’s worth of financial reserves

Portugal is to follow Ireland's lead an exit its EU-IMF bailout without the help of a precautionary credit line, prime minister Pedro Passos Coelho announced last night.

He made the announcement following a special cabinet meeting in Lisbon ahead of today’s meeting of euro zone finance ministers in Brussels.

Portuguese finance minister Maria Luis Albuquerque will update her counterparts, including Finance Minister Michael Noonan, today on the decision to return to full market access unaided when the programme expires on May 17th.

“We are making this choice because the strategy of returning to the market was successful, and because we made enormous progress in budget consolidation and because we recovered our credibility,” Mr Coelho said, noting the country had built up a year’s worth of financial reserves.

Falling bond yields and an improving economic climate had made a “clean exit” more probable for Portugal in recent months, something that many analysts believed was unthinkable six months ago.

Portugal became the third country to seek an international bailout in April 2011, when it was effectively locked out of financial markets at the height of the euro zone debt crisis.

Last Friday the troika completed its 12th and final review mission to Lisbon.

Mission accomplished
Deputy prime minister Paulo Portas said over the weekend while there was a sense of "mission accomplished", the country would continue to adhere to tight fiscal demands. "When the aid programme ends, Portugal cannot return to financial irresponsibility," he said.

Portugal returned to the debt markets last month, selling €750 million worth of 10- year debt. There was strong demand for the debt, the country’s first issuance in three years and 10-year government bonds were as low as 3.06 per cent yesterday, compared to a high of more than 18 per cent in January 2012.

The government of Pedro Passos Coelho, which came to power in June 2011, has presided over a range of tough fiscal measures including swingeing cuts to public sector salaries and pensions.

The Portuguese constitutional court has rejected a number of reforms demanded by the troika, viewing them as unconstitutional. These included a plan to merge public and private pensions last December, which forced the government to find savings elsewhere.

The government has also faced huge public protests at various points throughout the three-year period.

Improving picture
Despite the improving economic picture, weaknesses remain in the Portuguese economy. Debt stands at 129 per cent of GDP, and concerns remain about the banking system.

Unemployment, though falling, remains high at 15.2 per cent, with the country experiencing record levels of emigration.

Writing ahead of today's decision, Antonio Garcia Pascual of Barclays Capital said credit line would be welcome as it would allow the Portuguese treasury to carry lower cash balances, among other reasons.

“We think that a credit line would be welcome by markets as fragilities remain, which could turn investor sentiment around in the event of internal or external shocks.”

Greek update
Finance ministers will also receive an update on the Greek bailout, following last month's resolution of a six-month stand- off over the disbursement of €8.3 billion in aid.

With the EU’s portion of the second Greek bailout due to expire at the end of this year, and the IMF bailout funds disbursements due to finish by the first quarter of 2016, discussion of further possible aid for Greece is likely to be contentious.

Last month euro group chief Jeroen Dijsselbloem said that a decision on further aid would not be taken before September.

Suzanne Lynch

Suzanne Lynch

Suzanne Lynch, a former Irish Times journalist, was Washington correspondent and, before that, Europe correspondent