EXCLUSIVE: Portugal Debt Issuance Head: No Question We’ll Do Green Issuance, Just Question of When

3 June 2021

- ‘We Need to Be Careful About Bringing Long-Dated Bonds to the Market’
- Portugal Has a ‘Good Set of Arguments on Which Rating Agencies Can Base Their Decisions’
- ‘We Don’t Expect Major Negative Surprises’ in H2 Concerning Funding Needs

By David Barwick – Frankfurt (Econostream) – It is much less a question of whether Portugal will do a green bond and much more a question of when, but two years from now could be the right moment, according to Cristina Casalinho, head of the Portuguese Treasury and Debt Management Agency.

In an interview with Econostream on Friday, Casalinho said that Portugal needed to exercise caution in issuing long-dated bonds, but that recently stable spreads had presented a favourable opportunity.

Portugal’s BBB sovereign rating could stand a chance of an upgrade once the crisis is past and the government gets its fiscal house back in the order it expects, she said.

In terms of green issuance, ‘this is not a question of doing or not doing a green bond, it’s much more a question of timing’, she said.

Although Portugal’s relatively small funding needs don’t easily accommodate new programmes, ‘sovereigns have a duty to participate in building up climate change awareness’, she said. This is a ‘duty to community’.

It is thus ‘not a question of not doing a green bond, it’s just about choosing the right time to actually execute it’, she said. The appearance on the scene of the Next Generation EU recovery fund makes the choice ‘even more complex’, given the fund’s interest in the same green projects, she observed.

Still, possibly in two years Portugal would be ready to issue a green bond, she confirmed.

Given a smaller investor base at the long end of the curve, Portugal ‘need[s] to be careful about bringing long-dated bonds to the market, and that is why if you look at our overall stock, despite the fact that at the margin we have been issuing on average maturities in excess of ten years, our weighted average maturity has been more or less stable at around eight years’, she said.

This could make a possible general shift of demand away from longer-dated maturities less of an issue for Portugal, she said. Still, the country participates to the extent possible in the trend among issuers toward higher maturities, she said.

Indeed, the stability of the Portuguese spread in the wake of measures the European Central Bank took since the pandemic broke out seemed ‘a very good opportunity to come to the market with a longer-dated bond’, she said, leading to a new 30-year PGB in February.

‘On a fairly regular basis we have been reopening our longer-dated bonds, although without adding new lines to the curve (except for the 15-year references)’, she said. ‘So terming out debt is dependent on the investor base, and the rating constraint also plays a role in some cases.’

The rating constraint could play less of a role in the not-too-distant future, Casalinho indicated. It is evident that economies can recover rapidly from the crisis once the public health situation improves, she noted, and Portugal has ‘good arguments’ in its favour.

‘The fundamentals of the Portuguese economy are solid, and when you look at the recovery, you see that it is anchored on very promising variables, like investment’, she said. Goods exports have returned to approximately the level of before the crisis, and even during the pandemic-induced recession, investment contributed positively to Portuguese growth, she observed.

Although Portugal will emerge from the crisis with a higher debt stock, the country ‘has a very good track record of reigning in the debt stock and posting primary surpluses’, she said. ‘So we believe that the economic recovery will allow what the government is forecasting, and that is to go back to a primary surplus by 2023, and we are also projecting by 2025 a debt stock below where we were in 2019.’

A strong government commitment to fiscal consolidation and strong growth ‘will help improve the overall debt dynamics’, she reasoned. ‘And so we believe this is a good set of arguments on which rating agencies can base their decisions.’

For now, Casalinho praised rating agencies for ‘waiting for the uncertainty to lift and for some more clarity about the underlying trends and fundamentals’, calling this ‘a very commendable approach.’

Asked about possible further modifications to Portugal’s 2021 funding needs, she noted the decline in new Covid-19 cases following the country’s second national lockdown, economic agents’ adaptation to constraints and the recent additional disbursement of EU SURE funds.

‘So when we look at the budget, things have been moving in line with forecasts and we don’t expect major negative surprises’, she said. ‘So I don’t expect major negative events in the second half of the year, but even in the worst case scenario of a new crisis, we have what we call embedded flexibility in our funding programme. So we can still increase the sizes of auctions.’

In the event of possible changes in the need to issue, then in light of market conditions and increasing yields, ‘it would be positive to lock in current rates as much as possible, taking advantage of the fact that the ECB is playing a very relevant role and that there is still appetite for long-dated PGBs’, she said. ‘So, I would target these instruments instead of resorting to others and by this continuing to improve liquidity conditions.’

Asked to confirm that no further syndications could be expected from Portugal this year, she replied that ‘another syndication would be detrimental for regular provision of liquidity.’