Bloomberg News

Sovereign, Bank Debt Risk Rises on Greek Austerity Vote Concern

June 22, 2011

June 22 (Bloomberg) -- The cost of insuring European sovereign and bank bonds rose on concern Greece may still struggle to pass austerity measures needed to secure further international aid and stave off default.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers increased for the first time in five days, jumping 8 basis points to 162, while the subordinated index climbed 16 basis points to 288, according to JPMorgan Chase & Co. at 4:30 p.m. in London.

Investors are concerned Greek Prime Minister George Papandreou’s victory in a confidence vote yesterday was not strong enough to ensure parliamentary approval next week for a 78 billion-euro ($112 billion) package of budget cuts. European finance ministers and the International Monetary Fund this week said they would hold back a 12 billion-euro payment due in July until passage of the plans.

“Yesterday’s decision was nothing which would bring a sustainable calm to the market,” said Stefan Kolek, a Munich- based strategist at UniCredit SpA. “Financials are the closest proxy to the Greek story because of their exposure to government debt.”

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed 11 basis points to 224. An increase signals deteriorating perceptions of credit quality.

Greek Swaps

Swaps on Greece rose 50 basis points to 1,947, according to CMA. That implies an 81 percent chance of default within five years. Contracts on Ireland jumped 19 basis points to 755, Portugal increased 26 to 778 and Italy climbed 11.5 to 179, while Spain rose 9 to 281 and Belgium was 5 higher at 151.

The cost of insuring company debt also climbed with the Markit iTraxx Crossover Index of swaps linked to 40 companies with mostly high-yield credit ratings increasing 14 basis points to 410. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.25 basis point to 110 basis points.

A basis point on a credit-default swap protecting 10 million euros ($14.4 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: Abigail Moses in London at

To contact the editor responsible for this story: Paul Armstrong at

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