Portugal spurns Tsipras call after bailout exit

Greece’s new Prime Minister Alexis Tsipras won’t get much sympathy from Portugal for his debt-relief call.

Facing challenges similar to those in Greece, Portugal worked on putting its house in order and followed Ireland in May to exit its three-year bailout from the European Union and International Monetary Fund without the safety of a precautionary credit line. As Greece now seeks a less painful way out, some in Portugal are crying foul.

“It’s important for everyone in the European Union that Greece respect its commitments, comply with European rules like everyone,” Portuguese Prime Minister Pedro Passos Coelho said on January 30. “Each one has to do their part. During these three years, we did our part of the job and so we can demand that the others also do so. ”

Portugal’s stance shows the tough task ahead for Tsipras as he hits the road looking for allies in his fight against austerity. While some euro area countries like France are open to concessions to help Greece revive its economy, Tsipras has found the possibility of a debt writedown a harder sell at many crisis-weary European nations. Consequently, Greece has retreated from its call for a writedown, and now wants to swap existing borrowings for new bonds linked to growth.

So far, bond yields don’t indicate developments in Greece are leading to a wider euro-region concern that could rally a different European response to the Syriza government.

Greece’s 10-year bond yield has risen more than 2 percentage points to 10.8 percent since the election of Tsipras as prime minister last month, compared with an increase of 17 basis points for the equivalent Portuguese rate to 2.62 percent. The Portuguese 10-year yield reached 2.326 on January 23, the lowest since Bloomberg began collecting data in 1997, after peaking at more than 18 percent in 2012.

Not Systemic

“Markets believe that Greece is not a systemic problem within the euro zone,” Philip Shaw, an economist at Investec Securities in London, said in a Bloomberg Television interview. “I think quite correctly markets are saying that Greek problems are not Portugal’s problems. Portugal has its own problems but it’s not in the same ballpark.”

Portugal’s 219 billion euros ($248 billion) of debt as a percentage of gross domestic product was the highest in the euro region after Greece in 2013, according to the European Commission. The country has cut primary spending by 11 billion euros since 2010, debt agency IGCP said on Jan. 15.

While Portugal emerged from recession in 2013, the scale of the blow dealt by the euro crisis meant the economy that year was about 5 percent smaller than in 2010, according to its statistics institute. Still, Portugal last month said it will follow Ireland with an early repayment of bailout loans from the IMF after borrowing costs fell and it sold 30-year bonds.

Top Lender

“If we have debt forgiveness, debt relief for Greece, then other countries, for example Ireland who really did take one for the European team at the start of the financial crisis by guaranteeing their banks, taking all of that bad debt onto the sovereign books, are going to put their hands up and say well we’ve been the good kids in the class and quite frankly we’d like a bit of a reward as well,” Andy Lynch, a portfolio manager at Schroder Investment Management Ltd. in London, said in a Bloomberg Television interview.

Portugal’s opposition may not just be about principles. It has money at stake. Between 2010 and 2011, Portugal made bilateral loans to Greece of almost 1.1 billion euros.

As a share of 2013 nominal GDP, Portugal’s total exposure to Greece is 1.1 percent, according to Bloomberg Intelligence economist Maxime Sbaihi, who added each country’s bilateral loans, and exposure through the European Financial Stability Facility, the European Central Bank and the IMF by capital share.

Special Treatment

Greece has already been cut some slack, Coelho said.

“A set of measures were accepted strictly destined for Greece that don’t apply to any other country,” he said. “Within certain limits, as Portuguese, making the effort we did, we accepted that differentiation. We know that Greece today has more time to pay its debt than we have or Ireland has. Greece isn’t under pressure annually to pay interest on its loans. It will only pay them from 2022.”

Facing push back from some in the euro area, especially German Chancellor Angela Merkel, Greek has backed down from its earlier stance. Finance Minister Yanis Varoufakis outlined plans to swap some Greek debt owned by the ECB and the European Financial Stability Facility for new bonds linked to the country’s growth, according to a person who attended his meeting with financiers in London late on Monday. Varoufakis indicated the move would allow Greece to avoid imposing a formal haircut on creditors, the person said.

Free Choice

Meanwhile, Coelho, who faces elections in September or October, has said that the effort required to comply with the bailout program and to repay creditors delivers rewards. Endorsing debt restructuring now could weaken that narrative.

The government targets a budget deficit of 2.7 percent of GDP in 2015, below the EU’s 3 percent limit for the first time since Portugal joined the euro currency.

The European Commission on November 4 said it forecasts Portugal’s debt-to-GDP ratio will drop to 125.1 percent in 2015 from 127.7 percent in 2014. Portugal forecasts GDP growth will accelerate to 1.5 percent this year from 1 percent in 2014.

“We are free to choose as we want, and we are adults to also choose the consequences of the responsibilities of our decisions,” Coelho said.