Average interest rates on new government debt issues rose in two and a half years (from early 2021 to June this year), virtually all that had fallen in the six years since the Troika.
According to data released by the IGCP, the agency that manages Portugal’s public debt, after completion of the adjustment and austerity program of the troika and the PSD-CDS government, Portugal returned to the markets and at that time began to raise the debt of the bailout (to official, IMF and European creditors).
In doing so, the country managed to gradually regain public credit (the confidence of investors, creditors, rating agencies) and this led to a reduction in interest rates on new debt issues. It was six years of relief.
In early April 2011, already bankrupt and unable to access markets at decent prices, Portugal announced that it would ask for a bailout from official creditors. At the time, it was impractical for the Republic to attempt to enter international markets.
At that time, yields on ten-year government bonds were already above 9%, according to data from the Bank of Portugal.
But the situation would get worse. The Eurozone would begin to be attacked by global speculators, many betting on the collapse of major countries (Italy and France were even mentioned), already after Portugal, Ireland and Greece (and the banking sector in Spain) went bankrupt and were forced to request international assistance.
Due to the so-called euro crisis, the interest rate on Portuguese ten-year OTs reached a record high of almost 14% at the beginning of 2012.
“No matter what”
The situation of a fierce attack on the Eurozone project would only begin to ease and resolve in July, with the famous speech of the then President of the European Central Bank (ECB), Mario Draghi, who, in a speech in London, for senior banking representatives worldwide, said it would do “whatever it takes” to protect the euro and avoid fragmentation of the single currency zone.
From that moment on, the atmosphere brightened. Subsequently, in late 2014 and early 2015, in order to fulfill its mandate to maintain price stability, in a context of low official ECB interest rates, the ECB launched a series of asset purchase programs, which provided a monetary stimulus to the economy. “, remembers Mário Centeno’s central bank.
In May 2014, the country ended its adjustment program and the troika, the mission made up of representatives of the creditors (European Commission, European Central Bank and International Monetary Fund), would eventually leave Portugal.
However, he began to return periodically to evaluate the results. Meanwhile, the debt to the IMF had been fully paid off, so the Washington mission stopped showing up (except for the regular annual Article IV visit, as with all IMF partners).
The EC and the representatives of European creditors (such as the ESM and the ECB) continue to monitor government decisions and the health of the economy and government accounts.
And so it will be until Portugal has paid off almost all of its debt with official European creditors. Portugal currently owes Europe a whopping €49.1 billion due to the 2011 bailout.
Boom years after 2014
In any case, the financial situation began to improve significantly during 2014, with the Republic reaching 2015 with an average interest rate for all new debt issues of about 2.7%, according to the IGCP.
Between that year, including 2015, and 2020 (the first year of the pandemic), Portugal could take full advantage of the ECB’s ultra-cheap money programs (almost free in some cases), plus the framework of zero and even negative interest rates that was in force from early 2016 to July last year.
The average interest rate on all new debt would then fall significantly by 3.2 percentage points and reach an all-time low of just 0.5% in 2020.
New grip from 2021
But, as mentioned, the world changed and in 2021 tensions in the commodity markets began to emerge and in early 2022 the Russian war against Ukraine broke out.
Then the inflationary crisis would begin. And in a flash, the gains made in interest rates over the six years after the troika disappeared, until the end of 2020.
From the beginning of 2021 to now (late first half of 2023), the interest rate on the new debt would lose everything it had fallen. In other words, in just two and a half years it shot up by 3 percentage points to the current 3.5% (average of the first half of this year).
While the ECB began violently raising interest rates a little over a year ago (to try to halt the high inflation caused by the war), the rise in interest rates is far from over as inflation is still far from over. away from the official two percent target.
In addition, the ECB began to knock out the bazookas of very cheap money. The largest of them all, the APP program, is being shut down and the Pandemic Asset Purchase Program (PEPP) should effectively end by the end of 2024. For this reason alone, government interest rates could receive a new upward impulse.
While the cost of all government debt (stock) remains low (1.7% in 2022), the truth is that the more expensive the new debt, the greater the pressure on the deficit (the interest paid is government spending).
Portugal paid €6.5 billion in interest to creditors last year, according to the Ministry of Finance. This year (Budget 2023) it wants to pay another 8%, about 7.1 billion euros.
Interest rates on savings bonds are rising
In the first half of this year, the interest account was even under control. According to Finance, it “grew by 1.4%”, due to “the evolution of interest rates and other government debt burdens and, to a lesser extent, due to the evolution of the interest rate level, with a focus on the payment of interest in the subsectors of regional and local government”.
The guardianship of minister Fernando Medina also explains that at the level of the state (a subdivision of government services), the year-on-year change in expenditure with interest and net charges of the direct debt of the state was 3.6% and ” essentially reflects growth rates associated with savings and treasury bills”.
To give you an idea of this new source of pressure, the rush on Savings Bonds (CA) alone resulted in an increase of more than 63% in the interest payable on this financial product. In the first half of the year, the State had to reimburse families who subscribed to CA with 545 million euros in interest, 210 million more than a year ago.
In order to “weaken” the pressure to “weaken” the interest rates payable by the State, Finance highlights “the fall in interest rates on loans obtained under the Economic and Financial Assistance Program (PAEF), due to the redemption and partial extension of the loan from the European Financial Stabilization Mechanism (MEEF), held in April 2022, which resulted in a reduction of the corresponding interest rate”.
Luís Reis Ribeiro is a journalist for Dinheiro Vivo
Source: DN
