What’s next for Portugal – debt restructuring or eurozone exit?


With Portuguese bond yields rising and a heavily criticised austerity programme in place, the chances of another bailout request, debt restructuring or a eurozone exit are becoming increasingly likely, according to Capital Economics.

With the situation worsening, Capital Economics senior european economist Jennifer McKeown says a Portuguese debt restructuring or even an exit from the eurozone “remains a very real threat”.

The Portuguese government’s austerity programme has already caused the resignation of two key ministers and a consequential parliamentary re-jig, with further plans to slash borrowing from 5.5 per cent of GDP to 4 per cent next year.

The situation has caused Portugal to delay troika’s review of its progress, therefore meaning the country cannot receive the €2.8bn loan tranche previously scheduled for July, and prompted 10-year bond yields to rise beyond 7 per cent.

McKeown suggests this is increasing the chances of the country needing to ask for a second bailout from its eurozone peers. Portugal recieved a rescue package in 2011 in order to help stabilise its public finances.

The economist adds that questions remain over whether another bailout would given the go-ahead by the German government, which has a general election looming later in the year.

Furthermore, there are doubts whether the European Central Bank would be able to use its outright monetary transactions programme to fill any shortfall in Portugal’s financing needs. The OMT was established to prevent a eurozone break but not to counter concerns about a country’s creditworthiness.

McKeown says: “Given that the recent surge in Portugese bond yields has related to a growing risk that it will not meet its fiscal targets the central bank might well argue that it is not its place to intervene.

“There is also a chance that the bank would refuse to help unless Portugal had maintained financial market access, which it may well have lost by the time another bailout was agreed.

”The upshot is that a Portuguese debt restructuring and perhaps even eurozone exit remains a very real threat.”