Divisions emerge over Portuguese bailout exit strategy

Divisions have emerged within the Portuguese government about the country's strategy for exiting its bailout, with finance minister Maria Luis Albuquerque favouring a precautionary credit line, putting her at odds with prime minister Pedro Pessus Coehlo's suggestion that the country may seek to return to private markets unaided.

Portugal intends to follow Ireland’s example in May to become the second euro zone country to exit an IMF-EU bailout, when its €78 billion programme expires.

The country’s relatively low bond yields, which have been hovering around 4 per cent, and successful issuance of debt this year has made the prospect of a clean exit for the euro zone country a distinct possibility - something that was deemed highly unlikely six months ago.

The latest troika review of the Portuguese programme published last week said that the programme was on track, with the economic recovery “more entrenched,” though it warned that pending rulings from the Portuguese constitutional court on the legality of a number of the government’s reforms, could pose a risk.

Troika officials have visited Lisbon for discussions with the Portuguese authorities about the bailout exit strategy, with finance minister Maria Albequerque, believed to favour the use of a precautionary credit line, with limited conditionality, from the European Stability Mechanism.

At issue is the country’s qualification for the Outright Monetary Transactions (OMT) programme should it choose to request a post-bailout programme. A condition of the ECB’s OMT bond-buying programme is that countries are part of a financial assistance programme, though the decision to deploy OMT is the prerogative of the ECB governing council.

With yields on sovereign debt remaining at relatively low rates and the 'break-up ' fear identified by Mario Draghi as a key justification for OMT retreating, the case for deploying OMT has receded significantly. The fact that Portugal would not necessarily qualify for OMT is emerging as one of the key reasons why the country may opt for a 'clean exit' from the bailout according to troika sources.

The European Central Bank’s OMT programme is widely credited with calming the euro zone crisis, though it has never been used. The decision by the German constitutional court earlier this month to refer a case on the legality of the mechanism to the European Court of Justice, has also raised questions as to whether the ECB would be prepared to deploy OMT in the immediate term.

With less than three months until its IMF-EU programme expires, Portugal’s penultimate troika review began last week.

Meanwhile disagreements are persisting between the Greek government and the troika of international lenders, with discussions now focusing on the health of Greece's banks following a review by BlackRock.

Troika officials returned to Athens today after months of delays. Some €10 billion remains to be disbursed under the current programme, though the fourth review of the second programme, which began in September, has stalled over disputes about the scale of the budget cuts needed for this year. Concern is now emerging about the level of cash needed by the Greek banks, with the Greek government asserting that €6 billion is sufficient. The country is trying to avoid a third bailout when its programme expires at the end of this year.

Euro group president Jeroen Dijsellbloem said last week that no decision on a third rescue package for Greece would be made before the summer, arguing that there was "no urgent reason" to discuss a follow up to the programme before the second half of this year. However, it is widely believed that Germany is reluctant to become embroiled in a discussions about a fresh euro zone rescue package before European elections in May.