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Portugal is Heading Towards Default

This week 3 European countries borrowed from international markets: France, Portugal, and Greece. We can see how much confidence the international investors have in these countries by looking at their borrowing rates:

This Wednesday, September 7th, France sold 3-month treasury bills at the rate of 0.544%. It is similar to the rate Germany pays at the moment, Germany pays around 0.540%.

However, on the same day, Portugal had to pay an interest rate of almost 5% (to be precise 4.959 %). Portugal managed to sell 854 millions Euros worth 3-month treasury bills. The cost of insurance against a Portuguese sovereign default, as measured in the price of CDS is around 1050 bps.

On September 7th, France had to pay 0.564% interest which is nearly what Germany pays for 6-month bills (0.550 %)

And finally Greece, On September 6th, had to pay an interest of 4.8%. Credit default swaps on Greece went up by 109 basis points and reached 2659 bps.

The European countries that are on the verge of bankruptcy find it difficult to borrow on long maturities, and they have to pay huge interest rates for the loans they borrow. However, rich European countries (that are generally in the north) can easily borrow at low rates and longer maturities.

As speculations continue, European parliaments are racing against time to supply lifelines to save Greece. French parliament has just passed a plan to give Greece more financial aid. This has to be approved by the senate as well, while at the same time Merkel in Germany is trying to convince German members of parliament to accept the aid package. The priority is to save Greece. If Greece falls, Portugal might be the next domino to fall.

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