Buoyed by Exports, Portugal Chooses a Clean Exit From Bailout
LISBON - Portugal on Sunday announced its exit from a three-year bailout program that has forced deep spending cuts and set off mass protests - but has also helped the country clean up its public finances and return to the bond markets after halving its budget deficit.
Prime Minister Pedro Passos Coelho said that Portugal had built up sufficient financial reserves to end the program on schedule and without requesting any additional line of credit from its European counterparts. Such a line of credit would have acted as a safety net if the country again struggled to meet its debt financing obligations.
The decision to fully exit the program comes after Portugal's international lenders - the International Monetary Fund, the European Commission and the European Central Bank - on Friday issued a positive assessment of the country's progress. Portugal, which was particularly scarred by the European debt crisis, received a bailout of 78 billion euros, or about $108 billion, three years ago.
'With the recovery of our autonomy, Portugal will be on an equal footing with the other member states' of the European Union, Mr. Coelho said in a televised address on Sunday evening, flanked by his ministers. Recent economic data shows that Portugal is making a steady, albeit fragile, recovery, after emerging last year from a recession. The economy is expected to grow more than 1 percent each of the next two years. Unemployment has fallen to 15.2 percent in the first quarter after peaking at 17.7 percent in early 2013.
Portugal opted for a clean exit from the bailout program, following the example of Ireland last year. That means Lisbon will not ask lenders for a precautionary credit line, which could be tapped if the country's finances deteriorate and it needs more European rescue funding.
After Mr. Coelho's announcement, Christine Lagarde, the managing director of the I.M.F., said in a statement that 'although uncertainties and challenges remain, Portugal is now in a strong position to complete the consolidation of public finances and further deepen structural reforms, which will be essential to achieve sustainable growth and job creation.'
European finance ministers are also expected to endorse Portugal's exit during a two-day meeting that starts on Monday. Mr. Coelho said Portugal had rebuilt sufficient reserves to protect itself against any financial market shock in the coming year.
Portugal had returned to bond markets even before the exit was announced. In April, Portugal issued €750 million worth of 10-year government bonds in the first such offering since the bailout started in 2011. The bonds were sold with an average yield of 3.575 percent, the lowest interest rate Portugal has ever received for 10-year debt. Mr. Coelho said at the time that the auction 'gives us confidence in the future.'
Such confidence, however, comes with caveats, particularly regarding the country's debt levels. Government debt has climbed to 129 percent of gross domestic product, from 94 percent at the end of 2010, when borrowing costs began to spiral out of control, eventually forcing Lisbon to request a bailout. And even though Portugal is officially exiting the program this month, international creditors will continue to monitor its finances. Under the current redemption schedule, Portugal is set to repay its last loan to the I.M.F. in 2024 and its last European loan in 2042.
'High levels of indebtedness in the economy, combined with continued high financing costs in a low-inflation environment, underscore the need for decisive measures to reduce corporate debt' and associated risk premiums, the international lenders cautioned in their review statement on Friday.
Many economists say that Portugal's turnaround - partly the result of booming exports, which have helped the country rebalance its trade - stands out when compared with progress in other ailing euro zone economies.
'I think Portugal did the right things,' said Ralph Solveen, an economist at Commerzbank. 'Its outlook is much brighter than that of Greece.'
In their review of Portugal's progress, the international lenders noted that 'exports continue to drive economic growth, while private investment and consumption have also started to pick up.'
The lenders also forecast a further decline in unemployment. The jobless rate is still about three percentage points higher it was than before the bailout.
In 2011, Portugal became the third euro economy to negotiate an international bailout - following Greece and Ireland - after the then Socialist government found itself struggling to meet its debt payments amid soaring borrowing costs.
A month later, the Socialists were ousted in a general election and replaced by a center-right coalition government led by Mr. Coelho, which has since implemented deeply unpopular spending cuts and tax hikes to comply with the bailout conditions. With Portugal set to hold its next general election in 2015, Mr. Coelho on Sunday urged the Socialists and other opposition parties to help create 'national consensus' to keep Portugal's fledgling recovery on track. Mr. Coelho said the country was emerging from a period of 'national emergency.'
But in a separate televised address on Sunday night, António José Seguro, the Socialists' leader, accused the government of deceiving the Portuguese about the scale of the country's turnaround. 'The program is finishing, but the austerity and sacrifices continue,' he said.
Portugal's return to bond markets is part of a broader global shift: Borrowing costs for European countries have fallen as investors move out of emerging markets like Russia and Turkey.
Spain has also benefited from this trend. Recent debt offerings by the Spanish treasury have offered much lower interest rates. On Friday, yields on Spanish 10-year government bonds fell to 2.97 percent, matching the previous intraday record low set in 2005. Greece, which is still receiving an international helping hand, also managed to return to the bond markets in April, selling €3 billion in bonds with a yield of about 4.75 percent. It was the country's first sale of sovereign debt in four years.
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