Portugal to reduce treasury cash cushion by 40% - debt agency

LISBON, June 29 (Reuters) - The cash cushion accumulated by the Portuguese treasury in 2020 is too high for the current evolution of the country’s economy and should be reduced by 40% to 10 billion euros this year, the head of Portugal’s debt agency IGCP said on Tuesday.

The treasury cash position stood at 17 billion euros in 2020, compared to 6.8 billion euros a year earlier, due to “initial prudence when the impact of the coronavirus pandemic on the economy was unknown,” IGCP chief Cristina Casalinho said, but the budget deficit turned out to be lower than feared.

“The aim is for the cash cushion to return to 10 billion euros this year and then progressively reduce it, coinciding with (eventual future) rating improvements,” Casalinho told a parliamentary commission. The remaining 7 billion would be used to meet the government’s financing needs.

While it was not clear when ratings improvements could occur, the positive trajectory seen before the pandemic led IGCP to expect a prompt recovery as the economy normalised.

“We believe the trend will be more favourable going forward as the level of uncertainty associated with macroeconomic developments also diminishes,” Casalinho said.

Fitch and S&P maintain Portugal’s rating at investment grade BBB, two levels above junk, with a stable outlook, while Moody’s has a rating of Baa3, with a positive outlook.

The government envisages a deficit reduction to 4.3% of gross domestic product this year from last year’s 5.7%, when the country suffered its biggest annual growth slump since 1936 and the debt-to-GDP ratio spiked to 133.6% of GDP.

Casalinho said “debt purchases by the European Central Bank (ECB) should be reduced, not unexpectedly, but gradually, because no one wants situations of rupture.”

The ECB bought the equivalent of two-thirds of Portuguese gross issuance in 2020, she said.

Reporting by Sergio Goncalves; Editing by Victoria Waldersee and Richard Chang