Portugal is not at risk of debt rollover crisis

  • Lusa
  • 12 October 2022

"Portugal is among the European countries, the one that kept its budget deficit under control compared to the others," said Paolo Mauro, deputy director of the Budgetary Affairs Department of IMF.

The IMF has warned that countries must be prepared in budgetary terms to avoid entering a debt ‘rollover’ crisis with rising interest rates but believes that Portugal does not currently run this risk.

In an interview with Lusa, Paolo Mauro, deputy director of the Budgetary Affairs Department of the International Monetary Fund (IMF), said that the rise in interest rates was a “challenge” for countries, so caution is needed.

“Over time, the cost of borrowing for governments goes up, and so it’s important that they are well prepared so that they don’t get into, for example, a ‘rollover’ crisis, where they have difficulty placing bonds at the next auction. Personally, I don’t think Portugal is in that phase at the moment,” he said.

For the economist, right-hand man of former Portuguese Finance Minister Vítor Gaspar, currently director of this IMF department, however, in Europe, this scenario “historically has been associated with rising interest rates and certainly in emerging markets,” so he warns of the need for countries to control the deficit.

“If governments get into a debt crisis, they will suddenly have to cut, which is even worse than doing it gradually. So our advice from here on is – especially as we see that borrowing costs are likely to rise – actions to reduce the deficit gradually over time are what is needed,” he pointed out.

For the economist, “now is the time to get our public finances back on track”, and this will be “a good sign because it helps avoid that big increase in the bond spread”.

In an interview ahead of the release of Portugal’s 2023 budget, Paolo Mauro highlighted Portugal’s budgetary stance in the face of the pandemic crisis.

“Portugal is, I would say, among the European countries, the one that kept its budget deficit quite under control compared to the others,” he said.

However, he warned that the country still has high debt, with the IMF estimating (according to forecasts released today) a debt-to-GDP ratio of 115% at the end of this year.

“So obviously, the debt vulnerabilities are there. I think that if the budget deficit continues more or less in the range that we expect, we can expect the debt to decline over time,” he stressed.

In this way, he said: “If the budget deficit continues to decrease a little bit, that would be a fiscal stance that I would say is consistent with both the gradual reduction of those vulnerabilities going forward and also with the efforts of the European Central Bank to reduce inflation”.

Not least because, he recalled, “reducing inflation is important because we know that when inflation takes root in the system, it harms everyone and increases uncertainty in the economy”.

Admitting that growth is a “concern” for all countries, particularly in Europe, given the very adverse shock to energy supply, he stressed that there are many uncertainties about the path of economic growth going forward.

“We are in a turbulent moment from here on,” he said.

The IMF this week released its economic projections update in which it kept this year’s global GDP growth forecast at 3.2% but cut by 0.2 percentage points (p.p.) for 2023 to 2.7%, with a 25% probability of falling below 2%.

It also slightly improved the growth outlook for the Portuguese economy this year to 6.2% but cut those for next year to 0.7%, proving more pessimistic than the government, which forecasts an expansion of 1.3% in 2023.

The Bretton Woods institution forecast an inflation rate for Portugal of 7.9% this year and 4.7% next year, which compares to 7.4% and 4% predicted by the Portuguese government.

The IMF, which does not yet include the policies outlined in this year’s budget, also estimates a deficit of 1.9% in 2022 and 1.4% in 2023 and a public debt to GDP ratio of 114.7% this year and a reduction to 111.2% in 2023.