Tough task for Portugal to match Irish bond success


Published — Thursday 15 November 2012

Last update 15 November 2012 5:52 am

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DUBLIN/LISBON: Portugal is going to have a tough time following fellow euro zone bailout beneficiary Ireland's route back into the bond markets.
Its first post-bailout venture — a bond swap — was right out of the Irish playbook. But further down the road subdued attempts to woo investors and deeper fiscal woes stand in Lisbon's way.
Portugal last month carried out the bond swap in an identical manner to the one Ireland ran in January. The Irish move later kicked off a flurry of bond activity in Dublin which included another swap, a first amortizing issue and the pinnacle — the raising of new long-term debt.
It was a clear success for Ireland, which like other countries bailed out by European Union peers had been locked out of capital markets because of fears it could not repay its debt.
Dublin credits the success to a strict implementation of its bailout program, the return last year to economic growth and a punishing schedule of investor road shows that started back in May 2011 when bond yields were approaching record highs.
Unlike Ireland, Portugal has had to grapple with recession, angry demonstrations, emergency budget cuts and — according to the head of Dublin's debt agency — a self-imposed exile from the investor roadshow circuit.
"Portugal has sort of disappeared from the international circuit," John Corrigan, chief executive of Ireland's National Treasury Management Agency (NTMA) said in a speech earlier in the year.
He contrasted this with Ireland's action after getting a bailout from the EU, European Central Bank and International Monetary Fund, known as the troika of lenders.
"With Ireland's entry into the troika program, we took the view that we needed to actually redouble our investor relation efforts... It is a slow, deliberate process but one which I believe is starting to pay dividends," Corrigan said.
The NTMA met more than 200 institutional investors from Europe to North America, Asia and the Middle East between May 2011 and the early part of this year, putting forward the case for an Irish recovery at a time when most analysts saw a second bailout as virtually unavoidable.
More recently Corrigan's team have held meetings in China, the United States and Europe as it mulls a syndicated issue in dollars, euros or both that would start 2013 off with a bang and make the need for more help seem almost inconceivable.
Portugal's journey has been far more downbeat. It only recently kicked off a series of road shows where it invited international investors to Lisbon to explain its strategy for an Irish-style return.
"The NTMA is more active and more transparent in talking to investors, but it could be a bit of an unfair comparison. The Irish really have to do it now," said David Schnautz, strategist at Commerzbank in New York, referring to a steep post-bailout funding cliff that Dublin has almost fully tackled.
"But just being open to be contacted is not enough. Ireland for example has flagged the types of clients it plans to target. We would not mind getting more information out of Portugal."

It is not just a question of timing and style, however. The traditional foreign-heavy holding of Irish debt — just 17 percent was in domestic hands at end-June — left Dublin with a relatively untapped buyer base at home when it began to plot a market return.
The NTMA detailed plans to diversify its funding in July to attract that group, saying it would issue staged payment, or amortized bonds and inflation-linked paper for the first time. It raised the first 1 billion euros of an expected 3-5 billion euros from the two types of bond a month later.
With the domestic, foreign-owned split in Portugal much closer to 50/50, fewer avenues would appear open to them.
"Portuguese banks and investors have been more involved in its bond market, so there's less low hanging fruit," said Danske Bank's Owen Callan, a Dublin-based primary dealer of Irish bonds.
Ultimately, however, the successful full return to the bond markets will depend on the economy. Again, Ireland is a better sell.
Despite relentless austerity, stubbornly high unemployment and growing numbers struggling to pay their mortgages, Ireland's export-orientated economy managed to eke out growth last year and avoid joining most of the euro zone in recession.
Portugal, by contrast, is one of those countries feeling the strain most, kicking off a debate that has appeared only on the sidelines in Ireland, whether bailout medicine — which recently included the sharpest tax rises in living memory — will only serve to push it into a recessive Greek-like spiral.
Popular patience and political consensus has begun to fray in Portugal — there is a general strike on Wednesday — whereas Ireland, who voted in a centre-right led coalition with a record majority last year has enjoyed industrial peace disturbed only by the occasional, relatively small protest.

That would explain why while both have witnessed big bond market rallies in recent months, the yield on 10-year Portuguese debt is still almost twice that of Ireland's at 8.89 percent.
"Ireland is seen as (one) who had been doing terribly well and suffered a setback, but it is an open, growing economy that has largely capped its bank problem," said Luca Jellinek, head of European Rates Strategy at Credit Agricole in London.
"But with Portugal the question of a second bailout will not go away. One can't help noticing the quality of their fiscal work is deteriorating as is the political situation.
"Basically, investors are asking, how the hell will Portugal grow."

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