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March 20, 2012, 1:55 p.m. ET
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Portugal May Need a Plan B
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By RICHARD BARLEY
Now it is Lisbon's turn in the limelight. Portugal's five-year bond yields are stuck around 16%, where Greek bonds traded in April 2011 when euro-zone politicians started to insist private creditors should take losses. The flash point is a €9.7 billion ($12.84 billion) bond maturing in September 2013 that isn't covered by Portugal's €78 billion bailout. Until Lisbon explains where it will find the money, investors will fear a repeat of Greece's debt restructuring.
Vitor Gaspar, Portugal's finance minister, hopes rising confidence will allow it to return to markets in time to refinance the 2013 bond. Encouragingly, Portugal plans to sell 18-month Treasury bills later this year. And a new International Monetary Fund analysis will show Portugal's debt peaking three percentage points lower than previously forecast at 115% of GDP in 2013, Mr. Gaspar says. That is comparable to Ireland and below Italy's debt levels.
But a gradual rise in confidence might not cut it, and T-bills alone can't plug the gap. Portugal will need to start issuing bonds well before September 2013; Ireland hopes to return to market this year to start refinancing a January 2014 maturity. The IMF usually wants to see funding available to cover the next year's needs.
That makes September 2012 a crunch point for Portugal, as March 2011 was for Greece. But the recession will make it difficult for investors to assess Portugal's ultimate debt sustainability probably until the end of the year—most likely after the decision on financing is needed.
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After all, Irish bond yields started falling only in mid-2011, after the country returned to growth and fixed its banking system. By contrast, Portugal has a long way to go on reforms and carries the added burden of three "junk" ratings.
The euro zone has said it is ready to help if a country that is fulfilling its reform program can't return to market. But Portugal's leaders have said they won't ask for help. The country needs some €25 billion-€30 billion more to fund it to 2015.
Yet it is in both sides' interests to address the market's concerns. From Portugal's perspective, a new funding deal might bring its return to market closer, as it would reassure markets that debt restructuring isn't the norm for the euro zone. And for the euro zone, funding Portugal for another two years would be a cheap price to pay to avoid a rerun of Greece's debt restructuring, which caused bond-market panic and likely sparked an unnecessary European recession.
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