quinta-feira, agosto 18, 2011

SOE/SEE debt coming home to roost

As mentioned earlier,  it is best to focus on the levels of GED – Gross External Debt, when evaluating country risk and solvency, together with its maturity profile in order to assess immediate liquidity considerations.  This is a more fundamental and stable measure of indebtedness than “sovereign debt”, which can have any number of definitions, such as:
-        Direct financial debt of the State (, including  Central,  Regional and Local Governments (Republic,  Azores, Madeira and municipalities)
-        Direct financial debt of the Public Administration, including the State, as above, plus the State guaranteed debt (aval do Estado)  and the debt of State-owned entities which Eurostat/INE may classify as part of Public Administration, from time to time (ex.  Estradas de Portugal, REFER, Metros, hospitals, municipal companies, etc).  This is the “Maastricht criteria” debt, based on the national accounts as prepared by INE/Eurostat, and is quite volatile and unreliable as borrowers are reclassified, sometimes retroactively. 

The Gross External Debt includes all the public external debt of the Public Administration (as defined above) which is held by foreign creditors/investors at any one time, plus all the private external debt, which includes banks (funding for mortgages and for PPP project finance loans), corporations (State-owned and private sector companies) and even households.
Only the Gross External Debt includes the debt of the State-owned corporations still classified by Eurostat/INE as mercantile (ex. CP, Parpublica, TAP, etc) and the PPP obligations, which may have to be paid by the taxpayers rather than through user-fees.  

Note that reclassification of State-owned companies from the “mercantile” to the Public Administration by Eurostat/INE does reclassify their debt (Republic Guaranteed or not) as “Public Administration debt) but does not change its legal status, nor the legal obligor/guarantor, nor the effect of any contractual cross-default clauses.  

Given the dimension of the debt of the State-owned companies, much of it held by local banks, the Republic (Tesouro), in its shareholder function has, in practice,  made loans to these companies to allow them to meet their maturing debt obligations, even those which are not Republic guaranteed, since these public service providers cannot “shut down”. 

Thus the  Portuguese Treasury extended EUR 1.3 Bln in loans to State-owned companies in the second quarter of 2011.  
Now , it has been announced even prior to relevant maturity that  Treasury will provide for the repayment of EUR 200 million by Metro do Porto to  PNB Paribas in mid-August.
In the first  trimester, the Portuguese Treasury had made only EUR 32 million  as shareholder loans to State-owned companies which still had access to the market for refinancing purposes. (concedidos pelo Tesouro tinham sido apenas 32 milhões de Euros)
State-owned companies have significant amounts of debt coming due over the next quarters.   

See Iceberg of Government contingent liabilities 

This Treasury assistance in repaying the non-guaranteed debt of State-owned companies represents, to some extent, the  "nationalization"  of the creditors exposure to these companies (SOE/SEE).   In the case of deficit-prone companies that are not yet reclassified by Eurostat/INE as part of Public Administration, these Treasury credits may be reclassified by Eurostat/INE as capital increases, which will have an impact on the  AP/Public Administration deficit for the purposes of the Maastricht criteria. 

These repayments represent an enormous refinancing effort on the part of the Portuguese Treasury, which benefits the (mostly external) creditors directly, as shown in the latest repayment, those who  over-extended “unguaranteed” credit to weak companies.   These “clean” unguaranteed credits,  which were quite unrestricted and were favoured by both the borrowers and the lenders, are now receiving the same repayment terms as Republic-guaranteed loans which were tightly restricted by the limits approved by Parliament (AR) in the annual budget law (OE). 

This is an example of moral hazard, and another argument in favour  of  reclassiffication of ALL  State-owned  and Municipal-owned companies which have operating deficits two consecutive years  as part of  Public Adminisration , in order to place them under the strict budget discipline of the DGO-Budget Directorate and of  Parliament (AR) through the budget (OE) law. 

This would imply that ALL public investment should again be included in the Budget (OE) law and subject to prior Parliamentary approval.  The list of central Government investment project,  PIDDAC, should be transformed into PIDDAPA,  the "Programa de  Investimentos e Despesas de Desenvolvimento da Administração Pública Alargada, including all the State-owned and municipal companies and PPP concession contracts, with liabilities up-dated annually.  This would ensure transparency and would force all PPP liabilities, including REF rebalancings and other add-ons, to be subject to the same overall budget restriction regardless of the contractual form used. 

For the time being, it would be important to confirm whether the loans now being repaid with the aid of the Treasury (
empréstimos agora vencidos)  had been previously acquired, prior to maturity, in the secondary markets at discount, by local public or private investors, thus allowing Portugal to at least capture some of the benefit of the sacrifices suffered by the more risk-averse external creditors.   

Mariana Abrantes de Sousa

De Abril a Junho 2011, o Tesouro fez empréstimos de 1300 milhões de euros, incluindo:
REFER - 434 milhões de euros
CP - 250 milhões de euros
Metro do Porto - 175 milhões de euros
Metro de Lisboa - 167 milhões de euros
RTP- 150 milhões de euros
EDIA  - ... milhões de euros
EVC - ...  milhões de euros
Frente Tejo - 3,6 milhões de euros, empresa a extinguir