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It is becoming more and more apparent to bond holders and investors that there is not enough bailout money in Europe to save all of the Eurozone countries that are in danger of defaulting. Portugal’s 10-year bond yield was up 24 basis points (bps) Friday alone, bringing it to 7.20%. That is an increase of 34 bps last week and 124 bps in a month. Below is a table showing how some countries on the euro are faring in the debt markets.

Country

10 Year Yield (12/6/2010)

10 Year Yield (1/7/2011)

Difference

Portugal

5.95%

7.19%

1.24%

Greece

11.62%

12.64%

1.02%

Ireland

8.17%

9.06%

0.89%

Spain

5.16%

5.53%

0.37%

Italy

4.50%

4.81%

0.31%

The markets are beginning to wake up to the dangers that Spain and Italy pose, but for now it seems their wrath is being directed mostly towards Portugal and Greece. As of the time of this writing, the Dow Jones Portugal index was down 4% Friday alone. But Portugal is more of a barometer as to how events might unfold with Italy and Spain. Jane Foley, senior currency strategist at Rabobank International, wrote in an analysis:

While the relatively small size of Portugal's funding needs suggests that a Portuguese bailout will not exert a huge amount of pressure on the eurozone support fund, it will raise the risk of a speculative attack on the Spanish debt market.

As for now, Portugal’s government is trying to hold the line against accepting a bailout. The government claims it doesn’t need financial help and that its own debt reduction plan will be enough. Obviously the bond market disagrees. It is also noteworthy that 44 out of 51 economists believe Portugal will become the third EU country to be bailed out by the European Central bank, according to a poll carried out by Reuters.

This week Portugal plans to raise up to €1.25 billion in a bond auction. This will be a major test of whether or not the market believes Portugal can enact austerity measures on its own and actually reduce its debt load.

In the coming weeks, look for the bond vigilantes to direct their attention more towards Italy. With a debt to GDP of 116% it is only a matter of time before investors realize that a 10 year yield of 4.81% is not nearly high enough to compensate for the risk.

Source: Portugal Inches Closer to a Bailout, Bond Vigilantes Eye Italy Next