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The Globe and Mail

In euro bond market, 007 is licence to kill

Cristina Povoa, a Portuguese broker, works the phones on Monday, Jan. 10, as the country's sovereign debt crisis worsended.

Francisco Seco/Francisco Seco/Associated Press

In the James Bond films, 007 has a licence to kill. In the debt markets, the licence to kill is 7 per cent.

The number refers to the yield on soverign debt. Once 7 per cent is reached, you're dying or dead. It happened with Greece. As its bond yields rose, the country's politicians insisted no bailout was necessary. They lost their fight when the yields hit a painful 7 per cent. A bit more than two weeks later, in late April, Greece's rescue was a foregone conclusion. In May, it formally accepted a €110-billion bailout from the European Union and the International Monetary Fund.

Ditto Ireland, where the process was the same. Deny, deny, deny, then -- whammo! -- Irish bond yields breached 7 per cent. A month later, in November, the EU and the IMF cobbled together a €85-billion bailout for the former Celtic Tiger.

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And Portugal? The country's bonds have breached the 7 per cent level a couple of times. They did so again on Monday, reaching 7.44 per cent at one point, in spite of aggressive buying by the European Central Bank. Yields that high are unsustainable and the Portuguese finance minister must know this. Ireland's bailout funds are a full percentage point cheaper than Portuguese bond yields, so why not take the EU and IMF loot?

Portugal's moment or reckoning may come on Wednesday, when it will try to sell as much as €1.25-billion in bonds. If it can't get debt out the door, or must pay 7 per cent and change to do so, the country will inevitably move one step closer to a bailout.

Next up? Perhaps Spain. Spanish 10-year bonds on Tuesday morning traded at 5.63 per cent. That's still well short of the fatal 7 per cent level, but not so far short to avoid nausea in Madrid.

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