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Portugal set fair to exit the bailout

Rates buyers are moving back into Portuguese government bonds as yields fall, growth returns and exports boom. The country finished the capital markets part of its 2014 funding programme in the first two weeks of the year and now looks forward to a possible clean exit from the bailout, which would have been unthinkable six months ago. That would be a political triumph for Portugal and the Troika. But it might be a step too far.

On February 11, Portugal priced a tap issue of 10-year bonds to yield 5.11% at a spread of 320 basis points over mid-swaps. Portugal’s 10-year bonds had been trading just below 5% at the start of February. That is a big rally from the 6.1% they offered at the start of January and an even more remarkable turnaround from the 7.4% they had offered just five months earlier in September 2013.

Portugal has returned to growth, helped by exporters that have also delivered a positive current-account surplus, a rarity for this country even in the boom years. Its centre-right coalition government survived a crisis last summer when growing popular opposition to austerity led to the departure of finance minister Vitor Gaspar, architect of the country’s stern fiscal adjustment. There was hot talk back then of the coalition splintering, early elections in 2014, a possible renegotiation of the country’s bailout programme with the Troika and even of sovereign debt restructuring.

Instead, the coalition government survived, stuck to its guns, and when the country’s constitutional court recently threatened to block unpopular budget items such as cutting state pensions by 10%, said that it would simply find cost savings or tax increases elsewhere.

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