Bloomberg News

Greece Leads Drop in Sovereign Default Risk on Rescue Package

July 22, 2011

July 22 (Bloomberg) -- Greece led a decline in the cost of insuring against a default on European government bonds after politicians agreed on an aid package to end the 21-month-old sovereign crisis and prevent contagion to Spain and Italy.

Swaps on Greece plunged 500 basis points to a five-week low of 1,660 as of 11:30 a.m. in London, dropping the most on record. The Markit iTraxx SovX Western Europe Index of default swaps tied to 15 governments fell 20 basis points to 243.

Europe’s leaders announced 159 billion euros ($229 billion) of new aid for Greece, including a pledge by banks to exchange and buy back the nation’s debt which may result in a short-term default. Even so, the International Swaps & Derivatives Association told Bloomberg News the plan “should not trigger” insurance contracts on Greece because the exchange would be “expressly voluntary.”

“We have been pulled back from the abyss,” said Simon Ballard, a strategist at RBC Capital Markets in London. “Euro- zone Armageddon does thankfully seem to have been avoided.”

Contracts insuring Italian debt fell 29 basis points to 224, Spain was down 24 basis points to 284, Portugal declined 108 basis points to 836 and Ireland dropped 97.5 basis points to 810, CMA prices show. All fell from records set July 18.

Swaps on Greece are down from an all-time high of 2,568 basis points on that same day, and still signal a 72 percent chance the nation will default within five years, according to CMA. That was approaching a 90 percent probability earlier this month. A decline signals an improvement in perceptions of credit quality.

Corporates, Banks

“Since this is expressly voluntary, it should not trigger CDS,” David Geen, ISDA’s general counsel in London, said in an e-mailed response to questions. “Also, since it is at this stage simply a proposal, there is nothing yet to raise to the determinations committee -- though that may not stop someone trying.”

The Markit iTraxx Crossover Index of 40 European companies with mostly high-yield credit ratings fell 11 basis points to 408, while the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped 5 basis points to 159, according to JPMorgan Chase & Co.

The bank pledge will provide financing of 54 billion euros to Greece by mid-2014, building to a total of 135 billion euros through the end of 2020, the Institute of International Finance said in a statement.

Credit-default 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: Paul Armstrong, Cecile Gutscher

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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