Sept. 12 (Bloomberg) -- The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds.
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 17 basis points to 353 at 5:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 14 basis points to 314 and the subordinated index jumped 15 to 550, according to JPMorgan Chase & Co.
Chancellor Angela Merkel’s government is debating how to support German banks should Greece fail to meet budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all-time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week.
“The situation in Greece is just the initial problem,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London. “Our economists expect a hard default is likely by year-end. We are focused on the consequences of that for European banks.”
Credit-default swaps on Portugal, Greece, Italy and France surged to records, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Portugal jumped 79 basis points to 1,213, Italy rose 40 basis points to 503 and France was up 11 at 189.
It now costs $5.7 million upfront and $100,000 annually to insure $10 million of Greek debt for five years, up from $5.5 million in advance Sept. 9.
Swaps on Societe Generale were 53 basis points higher at 443, Credit Agricole increased 41 to 331 and BNP Paribas rose 31 basis points to 306, according to CMA.
Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Downgrades are likely as the review period concludes, said the people with knowledge of the matter, who declined to be identified because the information is confidential.
“It would not be a surprise if Moody’s downgraded Italy and a couple of French banks” this week, Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a note to investors.
SocGen’s 1.25 billion euros of 4 percent, April 2016 senior unsecured bonds declined 0.28 cent to 98.31 cents on the euro, Bloomberg Bond Trader prices show. The Paris-based lender’s 1 billion euros of 4.196 percent subordinated perpetual notes dropped 2.4 cents to 54.1 cents on the euro.
BNP’s 2 billion euros of 3.75 percent, senior unsecured bonds due in November 2020 fell 0.91 cents to 99.66 cents on the euro, after climbing to a closing-day record of 100.56 cents on Sept. 9, according to Bloomberg Bond Trader prices. The bank’s 375 million euros of 5.2 percent subordinated securities due September 2017 declined 0.87 cents to 100.14.
Swaps on U.K. banks rose to records as plans to strengthen consumer lenders may cost as much as 7 billion pounds ($11 billion) to implement, a government-appointed commission said. Contracts on Barclays Plc’s senior debt climbed 30 basis points to 290, while swaps on Royal Bank of Scotland Group Plc notes increased 26 basis points to 394, CMA prices show.
The cost of insuring corporate debt rose to the highest levels in 2 1/2 years, according to JPMorgan. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 6.5 basis points at 198.5 after rising as high as 204.
Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings climbed 22.5 basis points to 797.5 after earlier touching 811.5, the highest since May 2009. An increase signals worsening perceptions of credit quality.
A basis point on a credit-default swap protecting 10 million euros ($13.7 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: Andrew Reierson, Paul Armstrong
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net