The Hot New Worry In The Eurozone…

portugal flag

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Greece is still furiously working out a haircut deal with its creditors, but the hot new worry in Europe is unquestionably Portugal, land of the surging bond yields.In a note that identifies: “TOP CLIENT QUESTIONS”, SocGen’s Global Head Of Economics Michala Marcussen writes

Will Portugal follow Greece? Portuguese bond yields have increased on the back of downgrades and fears that Portugal will follow in the footsteps of Greece. Under the current EU/IMF program, Portugal is due to return to market funding in 2013. For this to become
realistic, 10-year bond yields would have to decline substantially from the current level of
15.1%. In our opinion, the Portuguese government will bite the bullet and deliver deep
reaching structural reform and austerity in 2012. The risk, however, is that even a successful
program may not be enough to secure a sufficient decline in bond yields. That would leave
only two options (1) a second official package or (2) PSI. A firm commitment from euro area
policymakers that Portugal will not see PSI and, if necessary, funds would be made available
would clearly be helpful and push bond yields lower (and thus reduce the risk that an official
second package would be needed!)

And just in case you haven’t seen the chart on the 10-year Portuguese bond…