19th July 2012
As 2012 has developed there has been something of a change in financial markets perception of Portugal and today I wish to examine and analyse her situation. What this has led too is something of a contrast in the Iberian Peninsular where Spain’s fortunes have waned as Portugal’s have risen. This week for example both nations have raised finance via one year Treasury Bills and Portugal had to pay 3.51% whilst Spain had to pay 3.92%. So Portugal’s cheapest issuance of this type for some time meant that she had to pay less than Spain. Good for Portugal and ouch for Spain.
One can add some context to this by comparing with Germany where we return to my theme of negative yields of Monday as her one-year yield sits at -0.02% this morning. So better but still troubled is the correct summary of Portugal’s position.
When did this take place?
In essence Portugal’s bond yields have been improving since February. Her ten-year government bond yield was at 17.39% on the 30th of January and as I type this is now 10.53%. So investors in Portuguese government bonds have had a good 2012. Indeed those at the shorter end of the maturity spectrum have done the best of all as her two-year bond yield has dropped from 21% to 7.6% over the same time period.
For once the Securities Markets Programme of the European Central Bank may have found a market it has a profit it! The catch for it of course is taking it, as any attempt to do so would probably collapse the market.
What were we told would happen?
If we go back to the beginning of the 78 billion Euro bailout for Portugal we see this from International Monetary Fund Acting Managing Director John Lipsky (May 2011):
The Portuguese authorities have put forward a program that is economically well-balanced and has growth and job creation at its center………Growth-enhancing policies are central to the program
In return for this the IMF contributed some 26 billion Euros of the budget or just over 23 times Portugal’s quota.
So has economic growth contributed to Portugal’s apparent improvement?
Er not quite. But do not take my word for it let me use the Bank of Portugal’s Summer Bulletin for 2012:
…a 3.0 per cent decline in economic activity is projected for 2012, reflecting a significant fall in domestic demand and a positive contribution of exports……… For 2013, a stagnation of economic activity is projected, in a context of gradual recovery of domestic demand and accelerating exports
Indeed it expects a weak pattern for domestic demand in Portugal in both 2012 and 2013:
A sharp decline in private consumption is foreseen, reflecting unfavorable disposable income prospects, in an environment shaped by deteriorating labor market conditions and by the adoption of fiscal consolidation measures.
I highlighted the last bit as it is a new euphemism for austerity. This austerity will need to continue in Portugal in 2012 as whilst she managed a considerable reduction in her deficit in 2011 in was at the price of rising arrears. The latest IMF report estimated these arrears to be some 3 billion Euros.
The saving grace for Portugal over the next two years is explained below:
Hence, the current projection embodies further market share gains of Portuguese exports in 2012 and 2013
With the current outlook for many of Portugal’s export markets that is starting to look somewhat unrealistic. And many will be intrigued that the Summer Bulletin is slightly more optimistic than the Spring one when the outlook elsewhere has deteriorated substantially. But however one looks at it the “growth agenda” laid out by the IMF one year ago has in fact been replaced in reality by a shrinking Portuguese economy.
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