Euro Update (20): Portugal’s next debt auction and the futility of repurchases

I thought I had made such a big fuss out of the fact that Portugal hadn’t posted the date of its previous (syndicated) debt auction that I should be fair and report that it has actually announced the debt auction for this month. It will take place on March 9, it has a maturity of two years (from what I can make out it matures in September 2013) and it will auction somewhere between €750Mn and €1Bn.

I should also mention that the government repurchased some €110Mnof debt on March 2, from two bonds series (=€90Mn/€4.252Bn maturing in April 2011 + €20Mn/4.913Bn maturing in June)(denominators is what is left after the repurchase, not what was there before. To figure that out sum the nominator to the denominator in each of them). It was all very small business… I wonder what they meant to do. Were they trying to take the market’s temperature? Were they trying to see if they could repurchase some debt cheaply? Were they trying to get the rates to lower for the next auction? It’s a bit of a mistery, which without any sources in the government I cannot answer… What I can say however is that things must be getting tough, given that they are going back to repurchase the same bonds on March 9 (you get extra points if you realised that the repurchase data and the bond auction date coincide! 😉 . Between now and July, Portugal will have to pay up to €9.165Bn in bonds maturing this year. I have no idea of what the Treasury’s balance sheet situation looks like, but I hope it’s got the cash. Otherwise, someone better put a call to the EFSF.

Apparently, debt repurchases are not particularly easy tools to use in debt management. This VoxEU article considers that “solution” and comes to the conclusion that the efficiency of that policy hinges on “informational asymmetries [driving] a wedge between the expectation of future repayment of creditors and debtor. For instance, for a government committed to honour its country’s obligations and invested in the policies needed to guarantee repayment the “true” value of the debt is close to its face value. However, the same debt can trade at a discount if the government is not be able to credibly convey its commitment and financial markets are sceptical that it will be able or willing to carry out its policy plans. Under these conditions, a buyback would achieve substantial savings.”

Otherwise, a debt buy back will only increase the price of the debt. If Manasse’s example is reflective of reality, then “if the purpose of the restructuring is to reduce the burden of payments for the debtor and to have creditors sharing the losses, a unilateral partial default or a debt swap seem largely preferable to a buyback.”

So here’s a brief summary of events: on March 9, Portugal will issue and repurchase debt bonds, on the 10th the Portuguese government will face a motion of confidence in Parliament and on the 11th the heads of state and government of the Eurozone will meet to decide the future of the currency union. Its gearing up to be an interesting week…

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