A quick reminder of a wise old quote on writing plays:
If in the first act you have hung a pistol on the wall, then in the following one it should be fired. Otherwise don’t put it there.
—Anton Chekhov, Reminiscences, 1904 (producers of Lost take note, please.)
A quick glance at Wednesday’s auction of Portuguese government debt, according to Bloomberg (emphasis ours):
The securities due September 2013 were issued at an average yield of 4.086 percent, the country’s debt management agency said. That compares with an average yield of 3.597 percent at a previous auction of the same-maturity debt on June 9. The auction attracted bids for 1.9 times the amount offered, compared with a bid-to-cover ratio of 2.4 in June.
The bonds due April 2021 were issued at an average yield of 5.973 percent. That compares with an average yield of 4.171 percent at a previous auction of the same-maturity debt on March 10. Today’s auction attracted bids for 2.6 times the amount offered, compared with a bid-to-cover ratio of 1.6 in the March sale.
Now, that’s a healthy-looking bid cover (maybe it’s those yield-chasers).
However, the yield on the 2021 bond is worrying. It’s wafer-thin close to the hypothetical 6 per cent yield that Barclays Capital has previously said should be considered ‘unbearable’ by peripheral sovereigns.
After all, they could otherwise seek financing at 5 per cent interest from activating the European Financial Stability Facility. That is, the EFSF is there now, like Chekhov’s gun, so markets will prod sovereigns to see if they’ll fire it.
Well – could seek financing.
Matters are far more complex than a single calculation like that – accessing the EFSF would engage IMF involvement in a government’s fiscal strategy, for example, so perhaps it’s worth the price in sovereignty to suffer high yields for a while yet.
Although we’re not sure how long you could keep that up.
Related links:
The Big Pfffft and the Euro-peripherals – FT Alphaville
The eurozone bailout fund: A Q&A – FT Alphaville