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The Eurozone’s Narrowing Window

PRINCETON – Portuguese authorities recently made a preemptive offer to their country’s creditors: Instead of redeeming bonds maturing in September 2013, the government would stretch its repayment commitment out to October 2015. The deal was concluded on October 3, and has been interpreted as a successful market test for Portugal. Ireland’s authorities have conducted similar recent operations, exchanging short-maturity paper for longer-term debt.

These transactions highlight the broader strategy of buying time. Both countries are seeking to create a longer, more manageable repayment profile for their privately-held debt as they begin weaning themselves from dependence on official “bailout” funds provided by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund). Private investors are acknowledging the reality that repayments will likely be drawn out, because insisting on existing terms could cause an untenable bunching of debt-service payments, with possibly unpleasant consequences.

This strategy’s success presupposes that, in the interim, economic growth will strengthen the capacity to repay debt down the line. The debt ratios for both Ireland and Portugal are expected to peak at about 120% of GDP in 2013, after which they are projected to fall. The peak ratio and the subsequent downward trajectory depend crucially on the assumed pace of economic growth.

But growth prospects remain grim. The Portuguese economy is now expected to contract by 1% in 2013. In late June, the IMF projected modest growth, and, at the time of the “bailout” agreement in May 2011, GDP in 2013 was expected to grow by 1.25%.