Portugal suffers as liquidity and confidence drain away

The Eurozone may may be enjoying a lull in the region’s debt crisis, but Portugal is feeling the burden of its peripheral status, with liquidity shrinking, confidence declining and no sign of the economic growth that must eventually counter its €92bn primary debt.

Lorne Baring, MD and founder of Geneva and London-based B Capital, which acts as adviser to asset managers and private banks, said after a visit to Portugal this week: “Italian 10-year BTP yields were at 8% at the end of November. Now they are at 4.8%. It gives the impression that things in the Eurozone are OK.

“But it isn’t going the right way for some peripheral countries like Portugal. Portuguese 10-year bond yields are topping 13%, and spreads have widened from the start of the year. At these rates, Portugal will struggle to service its debt obligations and is likely to need a second bailout.”

He points out that Lorenzo Smaghi, ex-board member of the European Central Bank, has already admitted Portugal will be unable to refinance its debt and will need further financial assistance within a year. “It is intensely disappointing for Portugal,” adds Baring. “But the mood in Lisbon and Porto is more accepting of the crisis than in Greece. There is a realization that there is a lot to do, and they face severe austerity.”

Notably, the country does not have a technocratic government to tackle these challenges and it is very difficult to start reform because Portugal has less international export exposure than neighbouring Spain, for example. Measures are needed to stimulate growth and particularly to address high unemployment, especially among 20-30 year olds.

The frustration of Portuguese businesses and entrepreneurs is tangible, Baring adds. The country has some excellent industrial firms, many with full order books, but they can’t produce because there is no operating capital. Theoretically this should present direct and indirect investors with a strong buying opportunity, but few have the capital to commit.

“If you have the capital and the appetite you can certainly benefit from consolidation as these are businesses with full order books and good clients,” says Baring. “But apart from liquidity, volatility and politics across the Eurozone is keeping investors guessing and reducing risk appetite.”

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