Fisher Investments Editorial Staff
Geopolitics, Deficits, Developed Markets

P Is for Politicking, Progress and Portugal

By, 08/07/2012

While Greek sports fans mourned their men’s water polo team’s shock Grexit from the Olympic quarterfinals last weekend, Greece’s leaders had a decidedly better Sunday. Keeping with the EU’s favorite trend, Greek and troika officials reached a key agreement … on a plan to have a plan.

Delegates from the European Commission, ECB and IMF were in Athens to determine whether Greece’s reform progress warrants further bailout disbursements. Greece still owes the troika €11.5 billion in budget cuts originally due June 30 but delayed by two rounds of elections. Prime Minister Antonis Samaras and his coalition partners debated the cuts all last week, and on Sunday, they agreed to agree by early September—which was good enough for the troika to agree to return in September and decide on further aid then.

In the meantime, it seems Greece found a way to make the €3.2 billion bond redemption due August 20—a payment the government previously said it may not have the cash to cover. Keeping with the EU’s other favorite trend, officials compromised enough to keep Greece afloat. In this case, the ECB approved the Bank of Greece’s request to increase the amount it can lend to the Greek government. In a rather funny twist, the ECB holds the bond in question, and the Bank of Greece lends money it borrows from the ECB through Target2. Essentially, Greece will borrow from the ECB to repay the ECB. Which seems a hassle, but if it lets the ECB give Greece a break without formally extending the repayment deadline—and introducing questions over whether that would constitute a mini default—so much the better for investor confidence. So dedicated are EU officials to preserving the euro, there’s no plan too crazy.

While most headline focus lately has been on Greece’s stalled austerity program and Spain and Italy’s rising yields, Ireland and Portugal have quietly vaulted over the competition and stuck the landing like Gabby Douglas. Ireland got some notice with its return to primary debt markets last month, but Portugal’s progress has flown under the radar.

Portugal’s met all of the troika’s austerity targets since receiving its €78 billion bailout in May 2011. The ruling coalition, led by Prime Minister Pedro Passos Coelho, has pushed through spending cuts, tax increases, public sector cuts, labor market reforms and housing reforms and removed some barriers to starting a business—just to name a few. And though Portugal’s been in recession and its people have had to make difficult adjustments, they still broadly support Passos Coelho’s government. Not that Passos Coelho’s preoccupied with re-election—in a speech to party members last week, he said, “The path we are following right now is not right or wrong, it’s the only possible path. If one day we have to lose elections in Portugal in order to save the country, then, as they say, to hell with elections.” Maybe that, too, is politicking. But that a sitting politician would think such rhetoric would score points seems to highlight the country’s will.

This overwhelming resolve to make Portugal more competitive is likely one big reason markets have rewarded Portugal’s progress even though debt reduction hasn’t come quickly. Through July, Portuguese debt returned 28% in 2012 to date, and 10-year yields have declined by several percentage points. Portugal’s two-year bond yields have halved in the last year—falling from 12.7% to 6.3% on Monday. Also likely aiding investor confidence is the fact Portugal’s recession is expected to ease sooner than initially anticipated, thanks partly to export strength—helped along by improved labor cost competitiveness. Reforms made over the past year should further improve productivity and overall output as things progress, which should bode well for Portugal’s planned return to primary long-term debt markets next year.

While Portugal’s not out of the woods, its story shows even better than Ireland how beneficial economic reforms can be. Ireland entered its crisis with a competitive economy, giving it a head start. Portugal entered with a bloated public sector, restricted labor market and one of the strictest rent control regimes on the planet. That so much could change in such relatively little time—with yields falling and the economy showing signs of firming in the not too distant future—perhaps speaks to what Greece could eventually experience should it push forward with reform.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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