26 October 2013

ESM/Regling: Interview with the Expresso, Portugal - "The deficit has to disappear, eventually"

According to some government members, Portugal expects start negotiating a precautionary programme in the beginning of 2014. Are there already any contacts on this?

This has not been discussed in the Eurogroup, which is the decisive body to give a mandate to the Troika to prepare another programme of whatever kind. If one wants to go that way, a formal request from the government is the first step. We’ve not seen that and I do not expect to see that for a while because there’s no need now. So the answer to your question is no.

Taking in account the current situation what kind of support would Portugal need: a new bail out, an ECCL or a PCCL?

It’s far too early to say. The current programme has another 8 months to run. Let me emphasise that in my view Portugal has come a long way, it has made significant progress. The real economy is showing some encouraging signs... But now that one sees the positive results of that it’s really important to continue in order to see the full positive results of this adjustment effort, which has been significant. And then one can see sometime next year what is needed. I think nobody would want to take a very firm view on that now. 

Looking ahead at the eventual support that Portugal might need to return to the markets, would it be important to have all the main parties on board, including the main opposition party?

We don’t know what will happen next year. But it’s always good to have a broad consensus in the country to support the reform policies. In the end it’s crucial to have a majority in the parliament to implement them.

With the implementation of this budget, is the threat of a second bail-out out of the table?

I can’t tell you what will happen in the middle of next year. It’s good that there is more time with the current programme, which is going well. And indeed the troika came to the conclusion that it’s broadly on track, which is very positive. Let’s use the full possibilities offered by this programme, and that means implementing fully the current budget and in 2014 next year’s budget. And also structural reforms should continue because that’s how growth can, with a time lag, be generated. We know that structural reforms do lead to more growth and jobs, every country that goes through these difficult adjustments will again see growth and jobs when such reforms are implemented. The problem is that this doesn’t happen immediately, there’s a time lag. And we see that already now, the reforms that were implemented two years ago show some positive results, I can only encourage the government to continue on this way.

The goal of returning to markets by mid-2014 without a second bailout is still realistic? Just to clarify the difference between this and some kind of precautionary programme.

All these are instruments available from the ESM, but I can’t predict now whether they will be needed. Of course the ultimate objective of the current programme is that Portugal will be able to return to the market and to refinance itself at reasonable interest rates. I’m not ruling out at all that this is possible next year. Portugal was on a very good way until earlier this year, then there was the political crisis and that was a setback. But until then interest rates had dropped significantly. Why can’t this trend return? If the policy is clear, if the policy intentions of more reform and continued fiscal adjustment take place I think markets can react to that very positively. And if there’s a need I’m sure that European partners will continue to support Portugal, but it’s not possible to say now whether this will be needed. 

Will the disbursement of the financial tranche corresponding to the last troika mission be kept on hold pending the developments in Portugal concerning the budget?

This disbursement was already endorsed by the Eurogroup, it only needs to go through our internal legal procedures, but Eurogroup has already given the green light, so I don’t expect any problems with this particular disbursement of €3.7 billion.

The government identifies the Constitutional Court as one of the main risks for the implementation of the adjustment programme and next year’s budget. The IMF and the EC also voiced their critical concerns about the Court. Do you share the idea that the Court’s decision might be one, if not the biggest problem in the implementation of the programme?

I would not call it the biggest problem. If the Court concludes that one or several measures are not constitutional this will be an important event because the government will have to find other measures that have an equivalent result, but we have to respect rulings of CC’s, that’s true in every country. We saw in the past that when this happened, it created difficult moments for the government but I find it encouraging that the government was always able each time to find quickly measures to compensate the ones ruled unconstitutional by the Court. It doesn’t make the life of the government easy, but in democracies we have certainly to respect the role of courts. 

Do you think that some kind of restructuring of the Portuguese public debt will be unavoidable?

The answer is clearly no. The troika took a clear view on this saying that the debt is sustainable. Given that we finance a third of the Portuguese programme from the EFSF side for 22 years average maturity at fairly low interest rates, at the moment 1.5 per cent, we know that looking ahead this will have a very positive impact on debt developments. Initially, there was a debt increase and that’s normal in every programme and IMF programme, but with these favourable long term financing conditions it’s very easy to see how it comes down over time. Therefore I have no doubt that the debt is and will remain sustainable and there’s no intention of having any debt restructuring.

Could the issue of maturities extension be raised again?

There’s no debate at the moment about this and I don’t see the need for that because the maturity extension from 15 to 22 years was very recent. It was an important step that helped significantly Portugal to improve debt sustainability

Can Portugal use the remaining money in the programme for the banks to finance the state instead?

It may be possible. But first we have to wait and see how much is really needed for the banks. I know there’s money unused at the moment but it’s good to have a safety margin here in case banks do need more and then we’ll see. 

Full interview

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