Portugal bailout agreement

Portugal has agreed with the EU and the IMF for a bailout of EUR 78 billion, making it the third eur

(04.05.2011) Portugal has agreed with the EU and the IMF for a bailout of EUR 78 billion, making it the third euro area country that will receive financial help. In FX, the euro was roughly unchanged yesterday, while GBP, NOK and SEK weakened broadly.

By Anders Grøn Kjelsrud, Analyst at DNB Markets

The temporary Portuguese government started bailout negotiations with the EU and the IMF some weeks back, and reached an agreement yesterday. The exact details of the plan are still relatively sparse. What we do know is that the framework for the loan program will be at EUR 78 billion, spread over three years. Furthermore, Prime Minister Socrates said (according to the FT) that the plan not involves additional fiscal measures this year. But it is worth remembering that the government’s current plans already imply fairly harsh cuts, and are aiming at reducing the budget deficit from 9.6 per cent of GDP last year, to 5.9 per cent this year.

Although the three sides now have reached an agreement, the saga is far from over – the temporary Portuguese government will need endorsement from the opposition, while the EU countries must hold a vote. Still, the probability for the plan to eventually be passed must be considered as fairly good.  

The euro held firm versus the US dollar in FX, and EURUSD is currently traded around 1.48, roughly the same as yesterday’s morning. The FX players did not seem to bother much of the few macro publications that were issued yesterday either.

One exception was the CIPS index for the UK manufacturing sector. The index fell from downward revised 56.7 to 54.6 – the lowest level in seven months. The new order sub-index was among the components that fell the most, and may suggest the British manufacturing growth is slowing. In any case, yesterday’s publication, as well as several other recent macro figures, suggests that the Bank of England will be in no hurry to start tightening. As a result, the Sterling slipped throughout the trading day yesterday, and weakened by almost 1 per cent versus the euro.

Both the Norwegian and the Swedish currency also weakened broadly yesterday. EURSEK is up by roughly 0.7 per cent compared to our last report, while EURNOK has increased by somewhat more. Lower oil price and reduced risk appetite might help explain the depreciation of NOK.

It should also be said that EURSEK started its climb higher after the Riksbank released minutes from their policy meeting in April. But in our view the publication did not give any significant surprises. For some month ago, the minutes were dominated by concerns regarding the development in household credit and house prices – a long time headache for the board's majority and the main motivation behind the rapid hiking pace. However, recent development has been contained, and the committee now seems more concerned about accelerating wage growth, due to the rapid recovery of the labour marked, in addition to the development in long-term inflation expectations. In all, we still expect two more 25 basis point hikes from the Riksbank this year, in July and in October.

Here in Norway, the Committee in Norges Bank will meet for another policy meeting in about a week (12.05). The consensus view (including ours) is that the central bank will hike at this meeting, and lift the policy rate from 2.00 to 2.25 per cent.

However, we must not forget the key figures which are due before the meeting, and which potentially could change the situation. LFS unemployment and retail sales figures are due already today. The Norwegian labour market continues to improve, and the unemployment rate (as measured by LFS) dropped from 3.6 per cent to 3.2 per cent only from November to January. For February (average Jan-Mar), however, we expect a slight increase to 3.3 per cent.

When it comes to the consumption numbers, we estimate a decline of 0.5 per cent from February to March, after the shopping malls have reported a weak sales month. It should be noted that this estimate differs from the consensus, which, according to Reuters, expects an increase of 0.5 per cent.

Elsewhere today, ADP employment and ISM services are issued from the US (the former could provide a indication before Friday’s payrolls publication), while the highlight from the euro area might be the retail sales figures for February.