Mike Spychalski, CAIA
This week’s Chart of the Week deals with the sovereign debt crisis in Europe. Over the past several weeks the fiscal situation in Portugal has received a significant amount of attention, and there has been speculation that Portugal will be the next country to require a bailout package from the EU. Yields on Portuguese government bonds have been steadily rising throughout the course of the past year, and in recent weeks the yield on the Portuguese 10-year bond has been trending towards 7%. The 7% threshold is significant because both Greece and Ireland were forced to request a bailout package from the EU shortly after yields on their 10-year bonds exceeded 7% (based on a rolling 10-day average). The yield on Greek 10-year bond broke through the 7% threshold on April 16, 2010, and Greece requested a bailout package on April 23, 2010. The yield on the Irish 10-year bond broke through the 7% threshold on November 15, 2010, and Ireland requested a bailout package on November 21, 2010. Portugal had a successful bond auction on January 12, 2011, and yields on their 10-year bond have backed away from the 7% threshold. However, Portugal is still facing major fiscal issues over the near term. They have a significant budget deficit (9.3% of GDP as of 12/31/09), a high debt to GDP ratio (80% as of 9/30/10), a high unemployment rate (11% as of 11/30/10), and a low growth rate (1.4% as of 9/30/10). In addition, Portugal has over €20 billion (approximately $26 billion) in funding needs in 2011, and unless the market perceives a material improvement in Portugal’s fiscal situation, it will be difficult for the yield on their 10-year bonds to stay below the 7% threshold.
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