Bloomberg News

German, French Bond Risk Climb to Records on Slowdown Concern

September 22, 2011

Sept. 22 (Bloomberg) -- The cost of insuring sovereign bonds jumped across Europe with credit-default swaps on France and Germany surging to records as the global economy slows.

Contracts on Germany rose 13 basis points to 109, swaps on France jumped 16 to 205 basis points and Belgium, Italy and Spain also reached records, according to CMA prices at 5 p.m. in London. The Markit iTraxx SovX Western Europe Index of debt swaps on 15 governments climbed eight basis points to an all- time high of 362 based on closing prices.

Federal Reserve policy makers talked down the prospects for economic growth yesterday as they sought to revive the faltering recovery in a move known as “Operation Twist.” In Europe, manufacturing output contracted for the first time in more than two years, according to data from London-based Markit Economics, adding to concerns the economy could slide back into recession.

“The market decided to react to a worsening economic climate instead of the announcement of Twist itself,” said Jeroen Van Den Broek, a strategist at ING Groep NV in London. “The whole sovereign crisis has a huge effect and is starting to take wider scope.”

Credit-default swaps on Germany have almost tripled from 39 basis points in July, while France is up from 80, CMA prices show. Contracts on Belgium surged 26 basis points today to 304, while Italy rose 14 to 536 and contracts on Spain climbed 7 basis points to 437, according to CMA. Swaps on Ireland increased 14 basis points to 817 and Portugal rose 46 to 1,184.

Bank Downgrades

Ratings downgrades of banks in Italy and the U.S. also soured investor sentiment.

Intesa Sanpaolo SpA, Mediobanca SpA and two other Italian banks had their credit ratings cut by Standard & Poor’s after the company downgraded Italy on Sept. 20 for the first time in five years. The government’s rating was lowered by one level to A with a negative outlook on concern that weakening growth and a “fragile” government mean the nation will struggle to reduce the euro-region’s second-largest debt burden.

Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. had their credit ratings cut by Moody’s Investors Service yesterday.

Noting “strains in global financial markets,” the Fed said it will boost the maturities of the bonds it holds by buying $400 billion of long-term debt and selling a similar amount of short-term notes.

“Sure, they used very negative language but what do you expect them to say to justify a $400 billion package?” said Gary Jenkins, head of credit at Evolution Securities Ltd. in London. “In and of itself the move is neutral to slightly supportive, but you have to use negative language.”

Corporate Risk

The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings rose for a fourth day, climbing 41.5 basis points to 846.5, according to JPMorgan Chase & Co. That’s the highest since April 2009 and the biggest daily increase since Sept. 9, when the previous series of the index increased 59 basis points.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 12.5 basis points to 199.5, near the highest since March 2009.

Bank bond risk also soared, with the Markit iTraxx Financial Index of swaps on the senior debt of 25 lenders and insurers rising as much as 29 basis points a record 318, before paring the advance to 302. The subordinated-note gauge increased as much as 53 basis points to an all-time high of 555, before trading at 540.

A basis point on a credit-default swap protecting 10 million euros ($13.5 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; John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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