Portugal plunders pension fund to tackle debt cliff

Wed May 22, 2013 6:49am EDT

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LONDON, May 22 (IFR) - The Portuguese government plans to tap nearly all of its state-owned pension fund to ease it over the hump of a hefty EUR27.5bn of financing needs over the next two years, according to domestic news reports.

Portugal's social security minister Pedro Mota Soares is evaluating whether to invest up to 90% of the EUR10bn Social Security Financial Stabilization Fund (FEFSS) in Portuguese government debt, according to Economico on Tuesday.

The fund had EUR5.5bn invested in Portuguese public debt at the middle of last year, according to earlier reports in the same newspaper.

The new measures would free up a further EUR3.5bn, meaning the fund would own around 7.5% of all Portugal's outstanding government debt, deemed sub-investment grade by all the major ratings agencies and viewed as one of the riskiest assets in eurozone government bond markets by investors.

In Spain, a country hanging to its investment-grade status by a thread, at least 90% of its EUR65bn social security fund has already been invested into Spanish government debt.

Under FEFSS's present mandate, the fund has to invest at least 50% in Portuguese government debt, and can also invest up to 40% in investment grade debt.

The Ministry of Finance declined to comment.

CHALLENGES AHEAD

Portugal has around EUR120bn in total outstanding debt, according to Reuters data, split between bonds and T-Bills. FEFSS participates in both these markets, said a government official.

"They have always bought government debt, but that stepped up a bit at the end of 2010 under the previous government," said a government official, adding that he would not prefer not to comment on plans to change the fund's mandate.

Portugal issued its first new benchmark bond since it was bailed out earlier this month, a EUR3bn 10-year deal which allowed it to round off its funding needs for 2013, and start to pre-fund for next year.

In 2014, Portugal has around EUR9bn of additional financing needs not covered by state financing sources that will need to be raised in the capital markets. In 2015, this steps up dramatically to EUR18.5bn, according to an investor presentation compiled by Portugal's debt agency IGCP.

Portuguese bonds have rallied in recent months, bolstered by investors' appetite for yield in the wake of the ECB's rate cut last month and an as-yet untested bond-buying promise from the ECB, which has removed so-called tail risk from eurozone government bond markets.

Despite this tightening bias, however, the country's economic fundamentals remain on shaky ground. Portugal's debt-to-GDP ratio is set to hit a peak of 124% next year, according to government estimates, the third highest in the eurozone behind only Italy and another programme country Greece.

The yields on its 10-year bonds - which currently stand at around 5.2% - are also the third highest in the eurozone, behind only those of Slovenia and Greece.

Ireland - the third country to receive an EU/IMF bailout like Portugal - has 10-year yields of 3.4%, while Spain trades at around 4.2%.

German 10-year bonds - a haven for investors - yield around 1.4%.

In order to tackle the funding cliff ahead and capitalise on the recent renaissance in its debt, Portugal plans to return to regular auctions in the coming months.

It is also considering a debt swap of certain bonds approaching maturity in the next few months, something it successfully executed last year and offset around EUR3bn of redemptions, said a source close to discussions.

"We want to get to the end of the year in a comfortable position, so we can start to pre-fund for 2015 because that's really the challenge," said the source. (Reporting by John Geddie, editing by Alex Chambers and Julian Baker)

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