The IMF expects Portugal to return to bond markets in 2013. Sure, Portugal isn’t Greece and an outright default isn’t on the cards. Not yet.
But there are enough reasons why Portugal will find it hard to return to the markets, and might need a second bailout.
- Austerity: The most obvious reason is lack of growth. The Portuguese government is cutting spending and also raising taxes to tackle the deficit. These steps curb any growth potential, lower the tax revenue and can enlarge the debt to GDP ratio. Expectations are for a 115% ratio in 2013, without haircuts. This is certainly better than Greece, but still troubling.
- Hidden debt: Again, Portugal isn’t Greece. Also neighboring Spain has an issue with hidden debt, that is probably worse than Portugal’s. Nevertheless, it also found some “hidden debt” in the island of Madeira. Other holes like this could still
- European recession: The forecasts for Europe are getting more cloudy, and Portugal isn’t different. Adding this recession to the austerity plan weighs on the economy.
- ECB Subordination: In Greece’s case, the bonds held by the European Central Bank are exempt from a haircut. This can certainly scare private investors that are thinking of investing in Portugal. In case of debt restructuring, will private bondholders in Portuguese debt suffer? The ECB subordination is a bad precedent.
- No credit event: This is a tentative reason. The ISDA may still change its mind and rule that a credit event occurred for Greece. Currently, a credit event hasn’t been called for Greece, despite the aforementioned ECB subordination, the involuntary nature of the Greek “voluntary” debt restructuring and the Collective Action Clauses that have been added in Greek law. If this remains the case, Credit Default Swaps are made useless. Without real protection at hand, why should investors take a risk with Portugal?
Portugal will really need to surprise, either through very successful reforms, or with a change in the whole continent’s economic fate in order to return to the markets in 2013.
Currently it seems like wishful thinking.
Portugal is currently on the back burner regarding influence on the euro. It will certainly take a bigger role once the Greek drama takes a break.
Further reading: 5 Hurdles that Could Make Greece Bankrupt