Here’s How Portugal Delayed Its Debt Payments
Portugal has managed to roll over a substantial number of bond payments that were to be due in the next couple of years, the Wall Street Journal reports. In all, over 6.5 billion euros worth of bonds will have their due dates pushed back. Instead of maturing in years such as 2014 or 2015, the bonds are now set to mature in years such as 2018, giving the Portuguese government more time to pay back the loans.
The step is just the latest measure that the Portuguese government has taken in order to ensure that it does not need additional bailout funds from international organizations such as the European Central Bank or the International Monetary Fund. The current round of funding is set to dry up next year, putting the country in a financial squeeze. With past bonds having their maturity date pushed back, Portugal will have less to worry about as obligations have already backed the country into a corner. The country is facing a need of some 50 billion euros in financing next year, with austerity measures and borrowing the two most likely options for raising the money.
The move isn’t entirely bad news for bondholders, who will get increased interest rates in exchange for the later maturity dates. A bond that would mature in 2015 carried an interest rate of about 3.2 percent, whereas a bond that is pushed back to 2018 carries payments of approximately 4.9 percent — a significant jump in basis points.
However, this increase could prove problematic for the Portuguese government. By increasing the payments on their current debt, they are setting themselves up to be strapped for cash not just in the coming year or two, but for the rest of the decade. Some economists have pointed out that, while the rollover may provide temporary relief, it does nothing to address the central problem of overborrowing that has plagued the country in recent times. Portugal is expected to need to borrow over 40 percent of its GDP during each of the next two years in order to keep its budget afloat.
The move was generally viewed as positive for the riskiness of Portuguese debt overall as markets adjusted to the move. While there are still risks inherent in longer-term bonds, most analysts feel as if the short-term risk was more significant, and that the rollover addresses the more relevant problem at the cost of exacerbating a more distant menace. Still, the question of how the country will repay its massive debt loads is a problem that remains to be solved.
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