Portugal may be able to obtain a new credit line from official creditors when its current IMF-EU programme ends in June 2014 as the country's public debt dynamics are weak but close to stabilisation, Fitch Ratings says.
Moreover, Fitch believes that debt restructuring involving the private sector or debt maturity extensions are unlikely as they would undermine much of the fiscal progress Portugal has achieved so far.
Fitch forecasts Portuguese public debt to peak in 2014-15 at around 129% of GDP and to decline gradually from 2016 onwards. In Fitch's base case scenario, public debt is forecast to fall to 115% of GDP in 2022. This implies an average primary surplus of 3% of GDP over 2016-22, which would represent a substantial improvement on the average annual primary deficit of about 1.3% of GDP in the decade prior to 2008.
Since the start of the programme in 2011, Fitch's assumption has been that Portugal would need further official support when its current programme ends in June 2014. Fitch believes an enhanced conditions credit line is more likely than a precautionary credit line given stringent criteria for the latter.
Even if the IMF-EU programme were derailed by political shocks or by a harder stance from Portugal's official creditors, Fitch does not believe private sector involvement (PSI) is likely as it would, among other things, result in a higher upfront outlay from official creditors, and keep Portugal out of debt markets for much longer. Further, Portugal's debt dynamics are not as bad as Greece's were when Greece undertook its PSI debt exchange in 2012.
Similarly, Fitch does not believe that Portugal will opt for a distressed debt exchange involving an extension of debt maturities to fill a financing gap. While a bond maturity extension may reduce immediate gross financing requirements from the official sector and may be less economically disruptive than PSI, it could hinder the country's efforts to regain market access. Therefore, while a distressed debt exchange may seem a more attractive option for creditor countries than PSI, it may not save official creditors gross outlay over the long term as this default could keep Portugal out of the market for a prolonged period.
If Portugal was to negotiate a credit line in early 2014, it may underpin investor confidence significantly and smooth a return to the market.
© Fitch, Inc.
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