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Wednesday, March 23, 2011 4:50 PM

Ireland 10-Year Bond Spread Hits Record; Portugal's Government Collapsed; Portuguese 5-Year Yields Hit Record 8.2%; Death by 1000 Cuts

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As expected, the Portuguese government collapsed today in the wake of a dispute between political parties regarding increased austerity measures.

Bloomberg reports Portuguese Parliament Rejects Government’s Deficit Plan

Portuguese lawmakers rejected Prime Minister Jose Socrates’s deficit-cutting plan, threatening to topple his government and increasing the chance of an international bailout.

Following parliament’s vote against proposed spending reductions and tax increases, Socrates was set to meet President Anibal Cavaco Silva at the presidential palace in Lisbon and then address the nation, heightening speculation he’ll call early elections.

The Social Democrats, the biggest opposition group in parliament, contested the new austerity measures. The party has still said it supports Portugal’s plan to reduce its budget gap and meet deficit targets.

“With bond yields stubbornly high and heavy debt redemptions due over the next few months, it appears all but inevitable that Portugal will be forced to follow Greece and Ireland in accepting financial support,” economists Emilie Gay, Roger Bootle and Jonathan Loynes of Capital Economics Ltd. wrote in a note yesterday.
Death by 1000 Cuts

Tomorrow the EU leaders meet at a summit to discuss the sovereign debt crisis. The outcome is already certain: They will not solve a damn thing but they will agree to some meaningless items to make it appear they are solving something.

Please consider Irish Notes, Portuguese Bonds Drop as Debt Crisis Deepens Ahead of Summit
Irish two-year notes slumped, leading the bonds of the region’s most-indebted nations lower, on concern a permanent solution to the fiscal crisis will elude European Union leaders meeting at a summit starting tomorrow.

The declines drove the yield on the security to more than 10 percent for the second consecutive day, while the spread investors demand to hold Irish 10-year bonds instead of German bunds climbed to a record. Portuguese bonds slid before Prime Minister Jose Socrates faced a vote today against his deficit- cutting plan, which may spur early elections and the need for an EU bailout.

“It’s death by a thousand cuts,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “We’re waiting for Portugal. There isn’t actually a solution to the problem. Yields remain at unsustainable levels, technically forcing insolvency.”

The yield on the two-year Irish note surged 30 basis points to 10.17 percent as of 4:46 p.m. in London and earlier reached 10.70 percent. The yield has climbed from 9.09 percent at the end of last week. The 10-year yield advanced 21 basis points to 10.05 percent, widening the spread over bunds by 24 basis points to 681 basis points.

The Portuguese 10-year yield climbed 14 basis points to 7.63 percent, with the similar-maturity Greek yield up five basis points to 12.56 percent. The Portuguese five-year note yield rose to as much as 8.19 percent, the highest since before the euro was introduced in 1999.
Portugal 10-Year Yield 7.49%

Portuguese 10-year government bond yields are a mere 13 basis point from another all time high.

Greece 10-Year Yield 12.51%

Ireland 10-Year Yield 10.05%

Note: bloomberg's non-interactive Ireland Government Debt display as well as Bloomberg commentary shows the yield above 10% for the second day. The above chart shows 9.834% with no instances above 10%. I cannot account for the discrepancy.

ECB president Jean-Claude Trichet plans as many as three rate hikes this year. If so, it will only compound the problems of the PIIGS.

Mike "Mish" Shedlock
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