Bloomberg News

Sovereign, Bank Credit-Default Swaps Surge to Records in Europe

September 05, 2011

Sept. 5 (Bloomberg) -- The cost of insuring against default on European sovereign and financial debt surged to records on concern the region’s debt crisis is worsening.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 18 basis points to 328 at 5 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 24 basis points to 270, according to JPMorgan Chase & Co. Both gauges are at all- time highs based on closing prices.

An election loss for German Chancellor Angela Merkel’s party and reports of a rift between Greece and the International Monetary Fund fueled concern that support for bailing out indebted nations is waning. A senior IMF economist forecast a “hard default” for Greece by March, the Wall Street Journal said, as officials suspended a budget review and Italy backtracked on its austerity pledges.

“There’s a lot of uncertainty with respect to the implementation and outcome of any austerity plans and bailout measures,” said Markus Ernst, a credit strategist at UniCredit SpA in Munich.

Support from the IMF, European Union and European Central Bank is key to Greece receiving a sixth payment of loans under a 110 billion-euro ($156 billion) bailout approved in May 2010. The country’s finance minister said Greece’s deepening recession will probably scuttle its 2011 deficit targets and mean no growth next year, but denied that talks with the so-called troika had collapsed.

Greek Swaps

Credit-default swaps on Greece soared 182 basis points to 2,532, according to CMA. Contracts on Italy jumped 44 basis points to a record 446.5, Portugal climbed 46 to 1,026 and Spain rose 28 to 420, while Germany increased 5 to 84 and France was up 14.5 at an all-time high of 186.

Italian yields resumed their ascent as Prime Minister Silvio Berlusconi bowed to political pressure from allies and agreed to overhaul the 45 billion-euro austerity plan that had persuaded the ECB to restrain bond yields by buying the nation’s securities.

Berlusconi dropped a tax on the highest earners and eased cuts to regional governments. He and Finance Minister Giulio Tremonti agreed to the changes after an Aug. 29 meeting with officials from the Northern League, which opposed parts of the original plan that aimed to balance the budget in 2013.

Italian Yields

The yield on 10-year Italian bonds has risen for 11 days, the longest streak since the euro’s 1999 debut. It’s now at 5.55 percent, less than a percentage point away from its level before the ECB started buying the country’s notes on Aug. 8.

A U.S. lawsuit over the sale of mortgage-backed securities also undermined confidence in European lenders. Markit Group Ltd’s subordinated financial index jumped 39 basis points to 481, JPMorgan prices show. An increase signals deteriorating perceptions of credit quality.

Default swaps on HSBC Bank Plc increased 10 basis points to 125 and Barclays Plc rose 22 basis points to 252, after both lenders were named in the suit.

Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 61.5 basis points to 755.5, the highest since July 2009.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 13.25 basis points to 183.25 basis points, the highest since March 2009.

A basis point on a credit-default swap protecting 10 million euros 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.

--With assistance from Anchalee Worrachate in London. Editor: Michael Shanahan

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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