Debt restructuring: the proposals, one by one

The Portuguese Socialist Party and the Left Block will present this Friday the report made by the working group constituted to study public debt (which was, in 2016, 130.4% of GDP).

The measures the group suggests to the Portuguese Executive reflect the differences between both parties about the matter. Therefore, two studies were prepared: one concerning a reduction in expenses, and another about debt restructuring. Since they are aware of the difficulties in rapidly moving forward with the debt restructuring, the working group suggests at least four measures which can be immediately applied and which can generate 410 million euros savings in the 2018 State Budget.

• The Bank of Portugal should reduce provisions and pay more dividends

The economists from the Socialist Party and the Left Block suggest that the Bank of Portugal does not need to have such large provisions when purchasing public debt (which has been generating more income), since it reduces the dividends the central Bank pays the Portuguese State. The measure is already inscribed in the 2017 State Budget, but the working group suggests that it is taken even further: the organic law of the Bank of Portugal should be changed, in order for the establishment of provisions not being freely decided by the administration of the central Bank.

• Reducing the maturity of the debt

The working group also suggests that the IGCP (Portuguese Treasury and Debt Management Agency) chooses to make issuances with shorter terms and lower interest rates. The idea is to lower the current debt maturity from 6.6 to 4.9 years, an option which will save 387 million in 2018 and more than 1200 million in 2023.

• Reduce the State’s liquidity buffer

As another recommendation to the IGCP, the working group points their finger to the size of the liquidity buffer. The cash surplus is, in part, made of debt issuances, which translates in the payment of interests — therefore, economists suggest its reduction. On the other hand, the cushion is also made of the surplus from public companies and municipalities, so the document suggests the IGCP offers higher rates to public institutions which are not subject to the State’s treasury.

• Early payment to the IMF

This has been the chosen strategy, but experts suggest a further acceleration of the early payments of the loan granted by the International Monetary Fund. The goal is to save in interests, because the rates charged for this loan are higher than those charged by the markets. At issue is the early payment of over 7920 million euros; yet, the document highlights that only debt corresponding to 187.5% of Portugal’s quota (5000 million euros) is worth writing off, because IMF’s rates are only higher above this threshold. Nonetheless, both the IMF and European partners have to allow this early amortization.

• Debt restructuring

This proposal is only possible if negotiated with the European framework. The idea would be for the Government to extend for another 45 years the maturity for repaying debt to European institutions (currently at 15 years) and reduce the interest rate to 1%, a 1.4 percentage points decrease in comparison to what is now charged — which means, the maturity would be 60 years. This way, the current amount of public debt would decrease more than 30% (from 130.7% to 91.7%). In addition, at issue would an annual saving of 712 million euros in interests. The restructuring only comprehends 31% of debt; privates who own debt are left out of this restructuring.