Portugal’s Bond Swap is ‘Step on Long Road to International Market’

Portugal’s bond exchange on 3 October, in which investors swapped €3.75bn of government bonds due next year for longer-term debt, is a step towards regaining bond market access and a positive development, said Fitch Ratings. However, the credit ratings agency (CRA) added that its base case remains that the country’s current programme will be extended.

In the exchange investors switched into a bond due October 2015 from a bond due in September 2013, thereby cutting a €9.7bn repayment due next September to €5.98bn.

Fitch said that if Ireland is used as a template, then Portugal has now completed the second stage in its preparation for a return to the market, backdating the bond redemption profile. The first stage was to extend the maturity and increase the size of its Treasury bills. Portugal did this in April with its first 18 month T-bill since it lost market access.

Ireland’s third stage was the sale of a new 2017 bond and tapping an existing 2020 bond. This allowed Ireland to cover a significant proportion of its €8.2bn January 2014 bond maturity. By this third stage, international investors accounted for about 80% of the new money.

This third stage is still some time away for Portugal. Fitch’s expectation is that Portugal will receive another International Monetary Fund (IMF)/EU programme before it returns to the market. The weak economic outlook in Portugal, the size of the fiscal adjustment and fragile nature of the eurozone sovereign debt market means there would need to be a significant improvement in sentiment for it to return to the market in full next year. However, the European Central Bank’s (ECB) announcement on 6 September that countries exiting programmes are eligible for ECB bond buying under the Outright Monetary Transactions (OMT) means that partial support is now an option.

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