Not Greek yet
Portugal can avoid becoming a new Greece. There’s a strong likelihood that Lisbon won’t be able to fund itself on financial markets in the second half 2013 – contrary to the timetable agreed in the country’s May 2011 bailout plan. Yet when it turns to its euro zone partners for help, there’s a chance Portugal won’t have to force losses on its private creditors, like Greece did. Still, no one can rule out a worsening of the economic outlook that would tip it into Greek territory.
Euro zone governments have some reasons to agree to a second bailout without restructuring. So far the Portuguese government is doing a good job. It cut its budget deficit by 3.5 percentage points last year, and the International Monetary Fund reckons its 4 percent target this year is within reach. Other euro zone governments, like Spain, are struggling. A Portuguese debt restructuring would make a Spanish one more likely by stoking contagion fears. Portugal has a lower deficit than Spain, and lower government debt-to-GDP than Italy. Furthermore, Greek-style pain would break the taboo that euro governments and the ECB tried to put in place when they swore that the Greek private sector involvement would remain an exception.
Still, the country’s finances are in a fragile situation. Rising bank losses and contingent liabilities for state-owned companies could push up government debt. Austerity may prove self-defeating in the context of serious private-sector deleveraging – something the IMF worries about. Finally, the Portuguese people may reject seemingly endless austerity, especially if the structural reforms enacted by the government take too long to generate positive economic results.
If the choice is made to restructure the country’s debt in 2013 or afterwards, there will be some logic in doing it quickly. Portugal has about 107 billion euros of debt that could be haircut, equivalent to roughly 63 percent of 2013’s forecast GDP. That comes down to 49 percent if the ECB’s estimated 23 billion euros of Portuguese sovereign bonds are excluded. Another 33 billion euros of bonds come due between 2013 and 2015, reducing the haircuttable debt as time goes by. The longer Portugal waits, the smaller the benefit of a restructuring, or the more brutal it will have to be.