Antonio Nogueira Leite highlights that it was the IGCP liquidity surplus policy launched by the Pasos Coelho government that allowed this debt buyback. The market is wondering what the opportunity cost of the operation is, while IGCP could invest in the ECB at 4%.
The largest Portuguese banks and insurance companies sold the state's public debt until the end of last year at the request of the Ministry of Treasury and Public Debt Management (IGCP). Now, taking into account the figure put forward by the Expresso newspaper, with a global value of 3 billion euros of public debt acquired, this means that the institute led by Miguel Martin has consumed about 30% to 40% of the treasury surplus estimated in the 2023 precautionary budget.
This is because it is necessary to add to the expected 6 billion euros of the expected precautionary treasury surplus, a budget surplus that was not expected.
In October, the Miguel Martín-led institution said, in a written response to the Jornal de Negócios, that “as stated in the 2023 financing programme, updated for the fourth quarter, the precautionary treasury surplus that the agency aims to achieve until… “The end this year is about 6 billion euros.”
But this figure took into account a global deficit of €800 million (sub-sector treasury deficit for 2023 based on Ministry of Finance estimates) which falls on the IGCP map under “net financing needs”.
But since the available data indicate a historical surplus – the Public Finance Council estimates a surplus of 0.9% of GDP this year, and some indicate higher values, compared to an expected deficit of 0.4% – it is necessary to add to that a surplus of 0.9% of GDP. GDP this year. This amount of 6 billion reduces the budget surplus, providing a cushion of about 2 billion compared to the expected deficit.
The Treasury's precautionary surplus should therefore amount to around €8 billion, so the €3 billion spent on purchasing public debt from banks and insurance companies represents between 30% and 40% of this financial cushion for the IGCP.
Expresso wrote that the contribution to public liquidity that allowed this buyback process is represented by the entry of new funds from the recovery and resilience plan before the end of the year, and the financing of the state with savings certificates and the 2023 budget surplus, with this year’s surplus. An extraordinary revenue stream allows it to exceed the 0.8% of GDP that Fernando Medina predicted in October.
The newspaper said that the debt reduction that the Minister of Finance intends to do before leaving office will not call into question this level of surplus.
The question that remains unanswered is: What is the opportunity cost (to taxpayers) of purchasing this debt from banks so that the country can reduce the ratio of public debt to GDP to less than 100%?
Interest on the 10-year Treasury note is about 2.75%, and the two-year debt is at 2.64%. Banks sold debt lines at market prices at the end of last year, when interest rates were close to 3%, and at a time when the interest paid by the European Central Bank, where the IGCP can apply the treasury surplus, was 4%. .
It is noteworthy that the European Central Bank’s deposit interest rate remains at 4%, the highest level since the launch of the single currency in 1999, while the main refinancing interest rate remains at 4.5%, and the rate applied to permanent facility liquidity allocations remains at 4.75. %. .
Therefore, there is an opportunity cost in this process carried out by the IGCP by order of the Minister of Finance, Fernando Medina, who launched this special operation to reduce the public administration's debt burden to less than 100% of GDP before the end of the year.
The banks' debt portfolios were purchased “at market values and not at a discount,” according to sector sources that classified Nahj Finance and the body that manages public debt as “without pressure.” Expresso reported that in meetings and communications conducted by the Treasury and Public Debt Management Agency (IGCP) with banks, including CGD, BCP, Santander and BPI, a request was made to buy back the debt without the guarantee of banking sources, and there was no pressure.
“We are only selling what we were interested in selling,” a banking source told Jornal Economico. Banks can only sell debt that is not classified as Hold until maturity, i.e. held until maturity. Another source confirmed the sale of public debt to IGCP and stressed that it should be done by the end of the year. Another committee talks about “normal market operations.”
On the banking side, reducing exposure to sovereign risk meets regulators' warnings. In its financial stability report issued in the fall, the Bank of Portugal listed the increase in sovereign debt risk premia among the risks to financial stability.
On the part of insurance companies, the commitment to the public debt buyback process was not very large because insurance companies allocated their assets to products such as retirement and savings plans and other long-term products that could not be laid off and held until maturity (Hold until maturity), as a source from the insurance sector explained to Jornal Economico (JE).
The year ended with several meetings with major banks and insurance groups. According to Expresso on January 5, the aim of this process was to reduce the debt burden to 99.5% of GDP, that is, less than the 103% of GDP expected in the state budget proposal for 2024.
António Nogueira Leite, speaking to JE, commented that it was the IGCP's liquidity surplus policy – which was put into effect during the Troika period – when João Moreira Rato was head of the agency managing public debt and Pedro Passos Coelho was prime minister – that António's governments followed Costa maintained socialism, which now allowed debt buybacks from banks and insurance companies.
IGCP's financial reserves exceeded €15 billion in 2012 and 2013.
Concrete data on each bank's public debt exposure will only be available when the 2023 results are presented.
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