Cristina Casalinho – Up to her eyes in debt and loving it!
The Portuguese Agency of the Treasury and Public Debt Management (IGCP) is not an institution that is in the limelight for most Portuguese, yet it has a vital task is raising around €15Bn a year through sovereign bonds to ensure the State meets its annual running costs.
Text: Chris Graeme Photo: Joaquim Morgado
Although in its present form since 2012, the original roots of the agency which manages Portugal’s public debt go back to the times of the monarchy and reign of Queen Maria II of Portugal when the Board of Public Credit was founded in 1834. Later it became the Institute of the Public Credit Management Institute and morphed into the IGCP.
Invited to run the IGCP in June 2012, economist Cristina Casalinho says it was not an easy decision but decided it was a challenge that she was ready to take.
Then she had been working in the IGCP’s research and reporting unit since the institution in its present form was created and presided over by its first president, the economist Vítor Bento.
Cristina says her biggest mentors were the executive director António Pontes Correia and former director João Moreira Rato, the latter who had been president of the IGCP and is currently president of the post office bank Banco CTT.
Moreira Rato was an influential figure in leading the process for Portugal’s return to the markets post ‘troika’ and was very briefly the last CFO of Banco Espírito Santo which collapsed in 2014 and the first at Novo Banco which was created from its ashes.
Cristina balks at the idea that she feels treated differently by the financial boys in the suits because she is a woman and doesn’t believe there is much of a glass ceiling preventing women in finance getting to the top in Portugal.
“The fact that I’ve been around for so many years, everyone knows me, and I think that can be a plus, a competitive advantage. Furthermore, I had been writing articles for the newspapers for years and everyone knew what I was doing heading the research department at BPI bank, and we all get along well,” the IGCP president says.
Cristina Casalinho says there were times at international meetings, although it is less the case today, when she is the only woman in the room, and it can feel “a little intimidating”.
Now in her third three-year term at the IGCP Cristina says she doesn’t look to far to the future regarding appointments in other agencies or institutions although by law she cannot do a fourth term.
One of the issues that is poorly understood by the general public is the question of the €16.9Bn ‘bazooka’ EU funding that Portugal will receive in grants and loans and the idea that this will add billions more onto Portugal’s already high accumulated public debt which currently stands at around €274.6Bn. However, Cristina Casalinho stresses that the way the Next Generation EU facility has been organised – and more specifically the Recovery and Resilience Programme (RRP) and other top-up funds – is that it shouldn’t drown Portugal in even more debt.
“At the time the mechanisms were set up they were mostly intended to be growth enhancing for Europe (and Portugal) and channelled to projects that had not been previously considered, and so shouldn’t affect Portugal’s national debt,” she explains.
“Instead, what we are seeing is that some projects which were postponed, for one reason or another, are now being dusted off now that the funding is there, but before had not been implemented because of the cost and government spending priorities at that time,” adds Cristina Casalinho.
ECB Bond Purchase Programme
The European Central Bank has been operating a 100% bond purchase programme called the Pandemic Emergency Purchase Programme (PEPP) which is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the Covid-19 pandemic.
The PEPP is a temporary measure to purchase public and private sector securities, sovereign bonds in the case of Portugal. The Governing Council decided to increase the initial €750Bn by €600Bn in June 2020 and by €500Bn in December for a new total of €1.8Trn. However, the ECB will now slow the pace of its bond-buying programme in the final quarter of 2021, a shift that President Christine Lagarde insists isn’t a move heralding a wind-down in stimuli for the euro-region’s still vulnerable recovery.
In the case of Portugal, Cristina Casalinho says that 20% of the bonds are bought by the European central bank and the remaining 80% are bought by the national central bank – Bank of Portugal.
The economist says that the impact of the ECB bond buy-up and the effects of QE (Quantitative Easing) made Portugal’s bonds cheaper. Cristina Casalinho gives the example of the 2024 bond denominated in both US dollars and in Euros. “These bonds traded at different rates. Taking the difference between the two rates in corresponding equivalent euros produced a differential of 30 basis points. The ECB buying of Portugal’s bonds therefore makes them cheaper”.
Providing some background fundamentals, the head of the IGCP points out that today the Portuguese economy is better prepared to face external shocks and indeed experienced a “virtuous cycle” when Covid-19 stuck.
Although the first decade of the millennium was marked by accumulated macroeconomic imbalances which culminated in the intervention of the troika in 2011, growth foundations have strengthened significantly since 2014, with the economy rebounding and an improved convergence with the euro area.
To 2019, GDP grew for 25 consecutive quarters supported by an improving labour market and robust private consumption and although the impact on Portugal’s economy had been severe, the fact that the banks had rebuilt capital and liquidity and offloaded NPLs meant the sector was able to support Portuguese business through company and private moratoria on loans.
Moreover, as has also been underlined by the Governor of the Bank of Portugal (see feature article on pages 27-31) the effects are temporary thanks to robust growth of 3-4% in 2021, and improved fundamentals and concerted efforts from national and European authorities should support a solid recovery.
Portugal’s debt — is it that bad?
There have been alarming articles in the Portuguese press that Portugal’s accumulated non-financial sector debt (both public and private) had reached an eye-watering record of €762.5Bn at the end of H1 2021. But its public debt has actually been falling — it was €274.6Bn in September and that was down €2.9Bn in August. In addition, the Portuguese Government had managed a modest budget surplus for the first time in Portugal’s contemporary democratic history in 2019 of €177 million (0.2% of GDP) showing that the ministry of Finance and Bank of Portugal were making serious attempts to tackle the debt — until Covid-19 came along which forced extraordinary and unforeseen spending which raised the debt to 11.5%
Cristina Casalinho says that Portugal’s public debt will resume a downward trend this year after the debt-GDP ratio spiked to a maximum in 2020, but despite this the debt trajectory is downward and reflects Portugal’s firm commitment to fiscal stabilisation.
Who buys Portugal’s debt?
Apart from the European Central Bank and Bank of Portugal, the country’s medium to long-term debt (MLT) has been popular among investors. In 2019 22% of sovereign bonds were bought via syndications, 54% at auctions and 14% through exchanges. In 2020, 47% was via syndications, 45% through auctions and 8% through exchanges.
For long-term syndicated bonds, the biggest buyers in terms of countries in February 2022 – by way of example — of a €3Bn bond set to mature in 2052 and with a yield of 1.022% were France, Italy, and Spain (37.1%), This was followed the UK (17.6%), Germany, Austria, and Switzerland (14.9%, Scandinavia (9.9%) and Portugal (7.8%). to give an example.
From the entities that the buy the bonds, the lion’s share for that issue went to fund managers (40.7%), banks and private banks (32.1%), insurance and pension funds (14.2%), hedge funds (4.5%), central banks and official institutions (4.3%).
For 10-year bonds maturing in 2031 offering yields of 0.3%, appetite from funds is even greater (46.3%) – 35.5% from banks and 9.8% from pension and insurance funds.
Portugal’s Debt composition
Since 2020, and as a direct result of the pandemic, the share of bond purchasing by the European Central Bank and the Bank of Portugal has gone up (Eurosystem holdings), particularly regarding the BoP which saw the percentage of bonds held rise from 1% in December 2020 and 31% by January 2021. But during that same period, purchases by the ECB had steadily fallen and stabilised out from 19% in December 2020 to less than half (6%) by January 2021 and beyond.
Cristina Casalinho says that Bank of Portugal, which holds 80% of the bonds will “hold them to maturity” along with all the coupon payments which are returned to the central bank that goes into its dividends and return to the budget.
Another sovereign debt crisis looming?
Although Portugal’s economy suffered during the sovereign debt crisis following the US sub-prime mortgage and investment bank crisis in 2007, between 2010-2014 Portugal’s bond crisis was the result of a wider downturn of the Portuguese economy that had started in 2001 and only ended in 2016.
The period from 2010 to 2014 was the hardest and most challenging part of the crisis and included the 2011-2014 €78Bn international bailout for Portugal spearheaded by a troika of international institutional lenders comprising the ECB, IMF, and EC.
A mixture of internal recession and external financial crises meant that by 2008 Portugal was having problems servicing its government debt as interest rates on sovereign bonds soared to an unsustainable level as the Portuguese bond market fell victim to successive waves of speculation by bond traders, ratings agencies, and speculators.
In the summer of 2010, Moody’s Investors Service cut Portugal’s sovereign bond rating down two notches from an Aa2 to an A1. Because of spending on economic stimuli, Portugal’s debt had increased sharply compared to the gross domestic product. Moody’s noted that the rising debt would weigh heavily on the government’s short-term finances.
By November, risk premiums on Portuguese bonds hit euro lifetime highs as investors and creditors worried that the country would fail to rein in its budget deficit and debt. The yield on the country’s 10-year government bonds reached 7 percent — a level the then Portuguese Finance Minister Fernando Teixeira dos Santos had previously said would require the country to seek financial help from international institutions, which in 2011 it eventually did.
But does Cristina Casalinho think that such a disaster could befall Portugal again in the future after the country’s accumulated debt once again hit record highs in 2020?
“We’re not really concerned that will happen any time soon because things have changed quite significantly since then. This time round, the way that the European institutions have dealt with the crisis was in stark difference to the previous crisis a decade ago,” she says.
Cristina Casalinho says that during the sovereign debt crisis there was a “lot of finger-pointing” but looking specifically at Portugal and Spain “we were facing increasing imbalances” — in the first decade of the century Portugal’s economy suffered low growth bordering on stagnation (0.8% in 2003, 1.6% in 2004, 2.4% 2007 and 1.3% in 2011) and two recessions. (2002-3 and 2008-9)
“Portugal’s external deficit increased significantly with the overall indebtedness also expanding. It was difficult to sustain a situation of running twin deficits (10% budget deficit in 2009/debt-to GDP ratio of 111% in 2011) before getting into a serious financial situation,” recalls Cristina Casalinho who at that time was chief economist at the bank BPI. (Banco Português de Investimento)
“The way the crisis was tackled at that time was adopting specific solutions for each country. The European Stability Mechanism (ESM) resulted from the EU’s recognition that there needed to be an instrument to quickly make credit lines available to specific countries (Portugal, Ireland, Greece) in a timely and effective way,” says the economist adding that this was the first step towards recognising the need for a Europe-wide emergency credit package.
At an early stage, the only facility available was the European Financial Stabilisation Mechanism (EFSM) created for the European Commission to provide financial assistance to any EU country experiencing or threatened by severe financial difficulties and which evolved into the ESM.
While the ESM still exists, the first response to the current crisis was to also use the EFSF (European Financial Stability Facility) and the European Investment Bank (EIB) which was authorised to borrow up to €440Bn of which €250Bn remained available after the Portuguese and Irish bailouts and with its role today as the ESM is to “safeguard financial stability in Europe by providing financial assistance to eurozone states”.
“The first response to the Covid crisis was to take these instruments and the SURE line — which enables €100Bn in solidarity loans to support jobs and lives — to be the frontline instrument to face the crisis, but it was decided that such a crisis management approach was insufficient and hadn’t worked before, plus Spain, Portugal and Greece didn’t want to apply for these instruments because of the stigma from 10 years ago and the feeling of going cap-in-hand,” she explains stressing that this time round Portugal was not in the same position.
Instead, the new approach and the next step was Next Generation EU and having the EU providing loans to member states. “If you remove all credit considerations from the deployment of measures, which the EC did, the €740Bn ‘bazooka’ package was made more equal.
Low interest rates on borrowing — here to stay?
The head of the IGCP can’t say if low interest rates on State borrowing will continue. The ECB will ‘taper’ or slow down the bond purchasing pace by December (€1,850Bn). “The central banks have accepted that the €1.85Trn Pandemic Emergency Purchasing Programme (PEPP) will terminate in March 2022 and as a consequence we expect interest rates (and inflation) to rise.” (The ECB sees inflation rising towards 4% by December and falling back to just under 2% by 2022, although the Bank of France Governor Francois Villeroy de Galhau and ECB policymaker Pablo Hernandez de Cos see no reason for that in 2022 despite rising energy costs).
“The current economic conditions don’t point to very high interest rates will happening again (like in the early 1980s (13%-22%) or in 1990 in the case the UK – 15.4%). Nevertheless, Cristina Casalinho thinks they may go up slightly, but not so much as to strangle Europe’s recovery.
On the other side of the coin, if interest rates are so low, why would investors, institutional or private, even buy bonds?
Cristina Casalinho explains. “There are investment entities or big investors which hold the bonds for a very short period rather than waiting for maturity. Whenever the bonds go up, they draw the profits and when dealing with huge quantities of bonds, even a small increase on that scale is relevant.”
“In other cases, you see the investors need to buy bonds, in this case because of risk hedging requirements. Their constraint on risk doesn’t allow them to take on too much risk so they buy bonds as a low-risk safeguard, particularly if they have a benchmark of risk in their portfolios and have to replicate that benchmark when purchasing assets.”
Most researchers suggest that QE has helped to keep economic growth stronger, wages higher, and unemployment lower in Europe than they would otherwise have been. However, does QE have complicated consequences? As well as bonds, does it not increase the prices of assets such as shares and property?
“This is a frequent discussion among us economists. Of course if you do it too long or in too great a quantity the harmful effects will catch up with the European Central Bank. Today, trade barriers are much lower, it’s easier for capital to move around the world than in the 1920s and 30s when there were more rigidities and inflation was rampant. Today’s flexibility puts a lid on high inflation,” says Cristina Casalinho adding that labour has much less wage and price setting power these days.
Then there is another question. If all this debt held by Portugal, the other Western European economies and the US is sustainable?
“The ECB today holds around 50% of our treasury bonds. It’s no longer so much about sustainability but rather affordability.” She mentions economist Olivier Blanchard who suggested that there is no magic number for a dangerous debt threshold, be it 60% or 90%. Japan, for example, has a net debt that is 177% of GDP and its gross debt it 260% of GDP and investors still find it sustainable and arrived at the conclusion at the closure of Portugal’s presidency of the EU that there was “no imminent public debt crisis”. In fact it has argued that severe austerity measures did more harm than good in the last crisis and now argues that countries should be “careful not to remove support and policies aimed at recovery too early”. Cristina Casalinho says that it doesn’t matter if you have debt providing you can service that debt.
“The average rate of interest on the Portuguese debt stock is around 2% while the nominal GDP is expanding by around 6% so we still have a large gap, even if it falls back to 2%-3% and inflation keeps under 2% and we add around 0.5%-0.7% from projected improved labour skills to the growth potential we get over 2%, which means we should be ok,” says Cristina Casalinho.
There is the idea that in the 1960s and 1970s the Portuguese were thrifty savers, but with the entry into the EU and the explosion of imported consumer goods coupled with low interest rates, Portuguese consumers went from being big net savers to hardly saving at all. Cristina Casalinho says this is not always seen correctly.
“People tend to read too much into the very high savings rates back then in the 60s and early 70s. You must bear in mind that then emigration was more pervasive than today, and families stayed at home and relied on the male breadwinner. If you exclude remittances sent from abroad from the savings rate calculations, then the internal savings rate was much lower than today at 16-17%,” says the head of Portugal’s bond agency.
Another factor in savings at that time was the non-existence of welfare, public healthcare and social security which explains why savings dropped from the 1970s onwards. “Portugal’s savings rate is low, one of the lowest in Europe, although since the crisis savings doubled from 6% to 12%.
“In Portugal most of these increased savings went into bank deposits and the treasury didn’t benefit much from this increase in savings,” admits Cristina Casalinho who says that from 2018-2019 there was only a net subscription increase of around €700 million and from 2019-2020 again around €700 million. From 2021 to mid-year, the subscription rate was €350 million.
However, in April and part of May 2020 there was a significant drop in savings certificates when subscriptions dried up because people were confined at home during the lockdown, although there was a significant use of treasury online banking. However, in the second lockdown in 2021 the ICGP didn’t notice much reduction at all.
“I think that the public right now is deterred from investing in longer term savings products because if you want to access your money, the two products we offer don’t allow for that,” Cristina Casalinho points out.
The IGCP offers treasury savings certificates or Certificados de Afforo (not to be confused with bonds) which have a low risk and with interest paid automatically every three months. Now the IGCP only offers subscriptions to Series E certificates with a minimum investment value of €100 (100 units) and a maximum of €250,000 (250,000 units).
Modernising corporate and retail services
Regarding technology and digitalisation for the “wholesale business” of the agency, Cristina Casalinho says the IGCP compares well with peer agencies in other European countries, although she admits the Scandinavian countries are leading the field in terms of technological developments and that they are an intrinsic part of their national central banks.
In terms of the retail part of the business, the IGCP president says she is satisfied with the rollout of internet banking services for corporate clients, while for the public corporate administration sector — the tax authority is its largest client — it has revamped and modernised its internet banking system and platform in 2020. “We have two hats — the bonds and treasury certificates issuance responsibility, and we also act as a bank for the public administration sector,” Cristina Casalinho says adding that the IGCP is now overhauling the technological structure and software of the retail home banking service through a project, still in its infancy, to make it possible for general public savers open online bank accounts directly with the IGCP because presently “if you want to subscribe to or underwrite a treasury savings certificate you need to go to the post office (CTT)”.
Producing funding plans
The IGCP has an important role in elaborating funding needs and executing the funding plans which are passed down from the government and derive each year from the State Budget (Orçamento do Estado).
“We design the funding plan and then it has to be approved by the government, more specifically the minister of Finance. “Although we are at the end of the line, our funding plan and guidelines still need to be rubber stamped by the ministry,” explains Cristina Casalinho.
In conclusion Cristina Casalinho says that Quantitative Easing aside, Portugal’s creditworthiness has improved massively over the past few years. “When I started in 2012 the ratings agency Moody’s had Portugal at a B2 rating while S&P’s rating for Portugal was BB (both junk status).
“Now we have moved up three levels and it took Moody’s almost a decade to take us out of non-investment grade ratings and this was almost entirely down to our efforts to make structural and public deficit changes.”
But even before QE, which started in March 2015, the spreads on Portuguese 10-year bonds trading in comparison to benchmark Germany were trading at a 190 base point spread. At that time Spain traded at 100 base points and Italy 120 base points. In other words, Portugal’s bonds were trading at a more expensive rate by almost 200 base points compared to Germany.
“That gap with Germany is now closing and for Portugal these differentials today mean that we are now trading at 53 base points above Germany, Spain trades at 63 base points, while Italy still trades at around 100 base points, so one can see Portugal is doing better than these other southern European countries”, says Cristina Casalinho.
“Where we are today makes me happy. Ten years ago, the Portuguese economy contracted 7%, now we’re in growth. Things have improved as a direct consequence of overall improvements in our structural fundamentals. The goods and services deficit then had been nearly 10% and this year it’s around 1% while leveraging in the private sector has also been going down gradually,” concludes Cristina Casalinho, President of Portugal’s debt management and treasury agency IGCP.