By borrowing money from Europe instead of going directly to the markets to finance itself, Portugal saves on interest rates as the European Union is able to issue debt on better terms.
The European Union has already gone to the markets to get the money it needs to lend to member states. It was a historic debt issuance, with negative interest rates and record demand, which will be reflected in the costs of these loans to countries. Portugal has requested 5.9 billion euros from the SURE program, which provides support in the field of employment, which means it could save around 4.5 million euros per year compared to what it would have to pay if it went to the markets.
The first joint EU social bond issuance resulted in a 17 billion euros placement, with an unprecedented demand of 233 billion euros (i.e. 14 times greater). “Euro debt markets are writing a new chapter in the history books with this record EU deal, which was widely anticipated. More important than record demand is the price,” Commerzbank points out in a note signed by Michael Leister and Cem Keltek.
Thanks to investors’ robust appetites, interest eventually dropped from the initial estimate and was even negative in the case of the ten-year bonds. In the debt that reaches maturity on October 4, 2030, ten billion were issued with a negative yield of 0.238%. In bonds with a maturity of 20 years, the amount placed was seven billion with an interest rate of 0.131%. It is this issuance that will be the reference for the cost of the loans aimed at employment, the SURE, to the various countries.
In Portugal’s case, João Leão’s Ministry of Finance requested 5.9 billion euros from this line (to be received over three years). By borrowing money from Europe instead of going directly to the markets to finance itself, Portugal saves on interest rates since the European Union is able to issue debt with the same maturity at more favorable conditions.
“The ten-year Portuguese Treasury yield is 0.18% and for an amount of ten billion euros, in proportional terms, the country would have around 670 million euros in the ten-year issue, and a saving of 0.41%, so almost 2.8 million euros annually,” explains Paulo Rosa, senior economist at Banco Carregosa, in declarations to ECO.
The 20-year yield is currently around 0.56%, which allows for savings of 0.42%, in proportion, that would mean 470 million euros for Portugal or 1.7 million euros annually. “In total, Portugal will have an annual saving of approximately 4.5 million euros with this European social bond issuance,” says Paulo Rosa.