When it comes to sovereign debt in developed countries, the magic number is 7. If a country’s 10-year sovereign bonds fall so much that they yield in excess of 7%, it is usually considered unsustainable. In January, the Eurozone breathed a sign of relief as Portugal managed to conclude a debt auction at 6.77% … just under the magic number. This is due in large part to China and Japan participating and buying some of Portgual’s debt.
However, taking a quick look at the above shows that the trend has continued and now Portugal’s 10-year bond yield is well above 7%. I believe their next auction will be in April so it seems likely a bail-out from the new €500billion European Stability Mechanism (ESM) will come just beforehand. The ESM replaces the temporary €440billion European Financial Stability Facility (EFSF), a sign that Europe finally recognises that they can’t simply sweep these problems under the carpet.
Assuming Portugal gets its bail-out (followed swiftly by government cuts and higher taxes which will further hamper the country’s economic recovery), eyes will inevitably turn to Spain and Italy as the next two most at risk. Spain is the big one … if they require a bail-out then the Eurozone will be in serious crisis indeed and may be forced to increase their ‘ESM’ to ~€1 Trillion!