If far-reaching shifts in the southern European political landscape were on investors’ minds in the run-up to the Greek elections, they had no impact whatsoever on the response to Portugal’s first dual-tranche issue in January.
The Portuguese debt office (IGCP) generated total demand across the 10- and 30-year tranches of more than €14 billion, raising €5.5 billion at a very modest new issue premium.
“The fact that Portugal was able to generate orders of about €6 billion for its 30-year issue prior to the ECB’s QE announcement and the Greek election gives you a sense of the strength of investor confidence,” says Kateryna Taousse, director at PAAMCO in London.
It is not just IGCP that has been able to shake off any misgivings that investors might have about southern Europe’s shifting political contours.
Days before the Greek election, the state-owned Caixa Geral de Depósitos (CGD) chalked up a similarly successful landmark when it printed an €1 billion seven-year bond at a coupon of 1%. That, says CGD’s general manager of investor relations Filomena Raquel de Oliveira, was the lowest coupon ever paid by a Portuguese borrower for a seven-year maturity.
“We had more demand than in previous transactions from real-money accounts from Germany and Austria, which I think demonstrates how relaxed investors are about the political situation in Portugal,” she says.
As PAAMCO’s Taousse says, investors’ enthusiastic take-up of this year’s Portuguese offerings is a reflection of the hunt for yield in the eurozone – but it also suggests they endorse a somewhat debatable observation on Portugal’s politics made by the borrower at the time of IGCP’s cracking January benchmark. This insisted that no new major party or political force has emerged in recent years in Portugal.
Strictly speaking, this assessment is accurate enough. After all, neither the financial crisis nor the austerity that followed it has created any meaningful tailwinds for radical or extremist political parties in Portugal. Nor has it encouraged the creation of any new party with the strength or cohesion necessary to challenge the stranglehold enjoyed by the Socialists and Social Democrats, which between them have about 60% of the vote.
To date, neither of the two leading parties have lost much sleep over the emergence of a newcomer capable of harnessing widespread support à la Syriza in Greece or Podemos in Spain.
To a degree, this is a reflection of the fragmentation of Portugal’s left wing. The default setting for angry voters, say local bankers, has traditionally been the Portuguese Communist Party. Among other anti-austerity parties, the Bloco de Esquerda (Left Bloc), which hailed Syriza’s victory as a “new beginning for Europe”, has seen its popularity nose-dive in recent years.
The failure of the fragmented left to make a meaningful dent in the popularity of the largest parties is also a by-product of the continued recovery in the Portuguese economy.
“We went through a massive adjustment programme which reduced the primary deficit from almost 7% of GDP in 2010-2011 to close to zero today,” says Rui Constantino, head of economic research at Santander Totta in Lisbon.
“That took its toll in terms of unemployment, and people are still facing higher taxes than they did before the crisis, and in some cases a continued decline in wages. But in 2014, tax revenues were higher and unemployment was lower than expected, while private consumption picked up.”
He adds: “Lower interest rates have led to the average monthly mortgage repayment falling from around €500 to €300, which is providing a massive boost to disposable incomes.”
This recovery, and the feel-better factor accompanying it, is expected to gather further momentum over the coming months. Growth is forecast by the central bank to reach 1.5% this year and 1.6% in 2016, but economists think these projections might be on the conservative side.
“Portuguese growth will surprise to the upside this year, as long as Greece does not derail,” says Antonio Garcia Pascual, chief European economist at Barclays in London.
A subdued oil price will certainly help to underpin an accelerated recovery.
André Rodrigues, senior equity research analyst at CaixaBI in Lisbon, says: “The low oil price and the cheap euro should add 0.2% or 0.3% to the consensus forecast for growth this year.”
José Brandão de Brito, chief economist at Millennium BCP in Lisbon, agrees. He says that as a rule of thumb, a 20% decline in the price of oil stimulates a 0.5% increase in Portuguese GDP. He adds that the negative impact of lower oil prices on trading partners such as Angola is more than offset by their positive impact in Europe.
“Angola accounts for 6% of Portugal’s total exports of goods,” he says. “Spain takes 23% and is one of the world’s biggest beneficiaries of falling oil prices.”
Plenty of other indicators are also pointing in the right direction for Portugal. Savings are rising. So too are FDI inflows. Record low government bond yields, meanwhile, will support the IGCP’s strategy of early repayment of the IMF portion of the €78 billion bailout package.
Cristina Casalinho, CEO of IGCP, says that at an estimated all-in cost of 3.6% and with an average maturity of 7.25 years, the IMF loans are the most expensive and shortest-dated of Portugal’s bailout loans.
None of this means the Portuguese economy is out of the woods, but it is putting a spring back into the step of Portuguese voters, who have much less to be fed up about than their counterparts in Greece.
“Austerity as we knew it two years ago is over in Portugal,” says Brandão de Brito at Millennium BCP. “We may hear more anti-austerity rhetoric as we approach the election, but it is hollower than in the past. So I don’t think Syriza’s success in Greece will have a big impact on politics in Portugal.”
This might disappoint some of the agents provocateurs at either extreme of the political divide in Europe who have argued, with a large dollop of self-interest, that Portugal will inevitably follow in Greece’s slipstream if the euro starts to fall apart.
However, the truth of the matter is that although it has been convenient in recent years to pigeon-hole Portugal alongside Greece, the two economies have little in common beyond their popularity with tourists from Europe’s inclement north.
Whether this decoupling from Greece will be enough to give Portugal’s present centre-right coalition government an overall majority in this year’s parliamentary elections is another question. Most think it will not.
A number of local economists say they expect the centre-left Socialist party to win the election in September and October, but without an absolute majority. That might open the door for some of Portugal’s fringe parties to play a small but important role in the next coalition government.
The youngest of these is Livre (Freedom), which was founded in November 2013 by Rui Tavares, a former Left Bloc European Parliament member. Tavares, who would take issue with the assertion no new meaningful political party has been formed in Portugal in recent years, is on record as saying his Livre party could win as many as four or five seats in this year’s election.
This is dismissed as nonsense by some local economists, who say that with about 2% of the vote, according to recent polls, Livre has failed to capture the imagination of the Portuguese electorate. That might be complacent, given the traction that has been achieved in little over a year by Podemos in Spain.
"We need to stop even talking about exits from the eurozone. Bringing this into the public discourse again would be a disaster for everyone. If we start talking about Greece leaving the euro, the discussion will then move to Portugal, pushing our interest rates through the roof. Rui Tavares |
In a wide-ranging interview in Lisbon, Euromoney meets the jeans-clad Tavares in fighting form. A highly affable, 42-year-old historian and newspaper columnist, Tavares says he launched the Livre party in response to a perceived gap in the political spectrum after a falling-out with the president of the Left Bloc.
“Usually when academics are ostracized from a political party, they lick their wounds and return to academia,” he says, adding: “But because there had been no satisfactory response to the terrible crisis by the traditional parties, we felt there was room in progressive left-wing politics for a libertarian, ecological left that stands up for European democracy.
“We had never had that sort of left-wing party in Portugal. On the one hand we had a neo-liberal centre-left which has gone too far in terms of allowing the state to be dominated by private interests. On the other, we had a left wing which was too authoritarian, too traditional, too statist and sometimes too anti-European.”
The charge of anti-Europeanism is the very last accusation that could be levelled at Tavares. He is passionately and energetically pro-Europe, which is why he has chosen the poppy – “emblematic of European peace after a disaster caused by the failure of European politics” – as his party’s symbol.
“We need to stop even talking about exits from the eurozone,” he says. “Bringing this into the public discourse again would be a disaster for everyone. If we start talking about Greece leaving the euro, the discussion will then move to Portugal, pushing our interest rates through the roof.”
Tavares’ prescription for an integrated Europe is a project named Ulysses, which he co-invented in 2011. The choice of the name was at least in part a product of Tavares’ understandable dislike of the derogatory PIGS (Portugal, Italy Greece and Spain) acronym used as a collective reference to the crisis countries on the eurozone’s periphery.
Ulysses and his brethren, Tavares explains, continuing the Greek-mythology metaphor, were turned into pigs by the sorceress Circe, stripping them of their memory and their identity, and therefore of control over their own future. Tavares’ vision for a new Europe, he says, is an economic union that purges the hated PIGS caricature by recognizing the identity and potential of each member.
In the case of southern Europe, he believes this can be done by channelling funding into initiatives ranging from renewable energy and high-quality agriculture projects through to what he describes as the “silicon valleys” of Europe, which he says will be the natural by-product of much-needed investment in universities.
“Not a single one of the world’s top 50 universities is in the eurozone,” he says. “Oxford and Cambridge and a Swedish university are in the top 50, but there are none from France or Germany.”
Modelled on Roosevelt’s New Deal, Ulysses’ proposals include the creation of a European version of the Tennessee Valley Authority (TVA), which Tavares describes as a “federal agency with a regional perspective”.
He says that unlike the TVA, a Ulysses crisis agency would have a limited temporal mandate of 10 years, after which it could turn its attention to projects elsewhere – in the Baltics, perhaps, or in blighted urban suburbs such as France’s benighted banlieues.
A 76-minute video made by the supporters of the Ulysses project features rather too many guitarists clapping their hands and singing happy Homeric songs in southern European olive groves, but it also gives some detail of how the project would be funded, which would be based on a mixture of Eurobonds, the proceeds of a concerted battle against tax evasion, and a financial transaction tax which it reckons could raise between €70 billion and €400 billion a year.
It’s an optimistic – some would say Panglossian – blueprint for growth in Europe which Tavares insists is not incompatible with the Maastricht objectives of national debt levels not exceeding 60% of GDP. That is a far cry from Portugal’s debt today of about 128% of GDP, which will decline to 116% by 2020 if the country can achieve an average primary surplus over the next five years of 2.8% of GDP, according to Fitch’s numbers.
His split from the Left Bloc meant that Tavares was not one of the 74 signatories to a petition drawn up by the party’s president in March 2014 calling for an immediate restructuring of Portugal’s debt. One of those signatories was Greece’s feisty new finance minister Yanis Varoufakis, a close friend of Tavares and a vocal supporter of the Ulysses project, who has publicly declared Portugal’s debt to be unsustainable.
Tavares agrees. “We hope Varoufakis will be listened to, because he’s speaking European,” he says. “Of course, in the short-term he will focus on how to solve the Greek debt problem. But when we’ve found a solution for Greece I hope that in one or two years we will be talking about a Marshall Plan for southern Europe which will be beneficial for the north and the south.”
The Marshall Plan certainly worked for Germany, but its re-enactment in southern Europe today would presuppose a need for sweeping debt relief of some kind. Tavares implies that this could assume a variety of forms and euphemisms.
“I was not invited to sign the manifesto on debt restructuring in Portugal,” he says. “I am in favour – as any reasonable person should be – of minimizing our debt. But I am agnostic as to which tools we use to do so. For example, when the government uses historically low interest rates to sell 30-year bonds and pay back shorter-dated, more expensive IMF debt, to me that is a form of debt restructuring.”
That’s quite a stretch, given that liability management exercises of this kind generate savings on interest payments, but have no more than a marginal impact on total outstanding debt. Without fully fledged debt restructuring or relief, it is hard to see how many of Tavares’ unashamedly Keynesian proposals could be pushed through, either at a eurozone or domestic level.
Take one of his prescriptions for addressing the issue of Portugal’s still very high unemployment rate. Urban renewal, he thinks, would help chip away at a jobless rate of 14.5% across the general population and a frightening youth unemployment level of 34.5%, and make cities safer into the bargain.
“If we can renew city centres we can create jobs, revalue real estate and rebuild our infrastructure to make it more resilient to earthquakes,” he says. “A euro spent today on this saves seven on the rebuilding costs after an earthquake.”
Accelerated growth, says Tavares, could also be supported through some simple administrative reforms.
“We need a more efficient judicial system,” he says, echoing private-sector economists from both political wings. “Non-criminal cases which take three weeks to resolve in Denmark take up to three years in Portugal. We take twice as long to resolve these cases as Malta, which is the second-slowest system in Europe. So we need to invest in our court system by hiring rather than firing civil servants.”
This, he adds, would provide a far stronger incentive for investment than privatization.
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“We’re very much against privatization, which we think is bad for Portugal,” he says. “We need to keep TAP [Portuguese airline] in the public sector, for example, in order to help Lisbon to fulfil its potential as a global hub.”
So, if given half a chance, would Tavares look to renationalize some of the assets that have been the cornerstone of the government’s privatization programme? Revenues from this almost-completed programme exceeded initial expectations of €5 billion between December 2011 and September 2014.
“Renationalization is not in our plans,” he says. “We’re in favour of a mixed economy rather than one based on a statist vision. There is a role for the public and private sectors as well as for associations and cooperatives.”