The Ministry of Finance’s (MF) target for Portugal’s national debt by the end of this year is 107.5% of Gross Domestic Product (GDP), but new data from the Bank of Portugal (BdP) suggests that this burden will currently above the intended target. But there are events that can help curb the overall debt burden, such as the repayment of a huge government bond (OT) issued by the government of then Prime Minister José Sócrates in 2008.
According to calculations by Dinheiro Vivo (DV), the weight of the Portuguese debt would amount to almost 109% of GDP at the end of May. This value is clearly lower than at the end of 2022 (113.9%) and the first quarter (113.8%), but there are new challenges ahead in the economy that may require more efforts from the public accounts and the Portuguese.
Finance Minister Fernando Medina says he is fully committed to providing “accurate accounts” and compliance with the Stability Pact (which comes into full force next year).
According to Mário Centeno’s central bank, the nominal government debt amounted to 280 billion euros at the end of May. Assuming that GDP will grow nominally by 7.5% this year (assumed by the government in the Stability Programme), this means that the EUR 280 billion now equals 108.9% of the expected GDP for 2023.
After an explosive 2022 in some sectors that have gained a lot from the first wave of extremely high inflation, there are starting to be signs that Portuguese activity is slowing down, due to the very sharp rise in interest rates, which is starting to hit household budgets and investment activities , despite still buoyant tourism, which will have already surpassed pre-pandemic levels.
The mission of economists from the International Monetary Fund (IMF) that monitors the Portuguese economy says that “the biggest risk now comes from the war in Ukraine”.
And it warns that “accelerated normalization of the European Central Bank’s (ECB) monetary policy and more restrictive financial conditions could affect growth and budgetary positions”.
In addition, “the end of loan moratoriums could lead to an increase in insolvencies, reducing investment and bank capital” and “a slower use of EU funds could dampen the recovery”.
Although it is falling, the IMF warns that “government debt will remain high and vulnerable to downside risks”, “while the rise in real estate prices brings additional risks”.
Rising commodity prices and wage pressures could lead to sustained higher inflation and further weaken the outlook.
Medina recently said he expects budget execution to become more difficult in the future, yet events that could bring overall debt down, curb its rise and bring it on track for official target should still be considered . (PE).
Pay off 9.4 billion euros inherited from Socrates
One of the trumps, perhaps the most valuable, should be played in October, when it wins an OT worth 9.4 billion euros, whose coupon rate is 4.95%.
This debt (an OT with a maturity of 15 years) was contracted in late October 2008 by the government of Sócrates and then Finance Minister Fernando Teixeira dos Santos, a few days before the collapse and nationalization of BPN and the start of serious financial problems in the bank and in the country, which later spilled over into the public accounts, culminating in bankruptcy in early 2011.
It is now up to Medina to settle this debt with major national and international creditors (mainly financial institutions and banks).
The amount will not be the same (€9.4 billion) if the agency that manages the public debt (IGCP) decides by October to ease the payment in question through a partial early repayment of the OT (buyback) or a replacement.
Partial payment to one of the bailout creditors
In addition to this effort, Portugal still wants to proceed with a partial payment to one of the largest creditors from the time of the troika.
According to the IGCP, a repayment of EUR 1.5 billion is foreseen for the European Financial Stabilization Mechanism (MEEF), a European rescue fund that was urgently created in May 2010, when some countries began to capitulate on the markets (alongside the Portugal , Greece and Ireland).
Portugal has been paying off what it owes to this European creditor for some time (the IMF has already received everything it was supposed to receive), but it still has to pay more than 20 billion euros to the MEEF, the debt service indicates. The last installment of this troika-era loan is expected to occur in 2042.
Finally, there is another factor that may contribute to reducing debt, which received a strong upward impulse from the rush on savings bonds.
Another brake may be the use of state deposits. According to the Treasury, the target at the current budget execution is to get about 300 million euros from the mentioned liquidity and safety cushion, which will help to reduce the debt in that proportion.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
