Bloomberg News

Sovereign, Corporate Default Swaps Rise on Recession Concerns

September 29, 2011

Sept. 29 (Bloomberg) -- Credit-default swaps insuring government and corporate debt rose on concern Europe’s deepening debt crisis will trigger a global economic slump.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased four basis points to 337 at 10:15 a.m. in London. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 2.5 basis points at 195, JPMorgan Chase & Co prices show. Increases signal worsening perceptions of credit quality.

Global investors anticipate Europe’s debt crisis leading to an economic slump, financial meltdown and social unrest in the next year, with 72 percent predicting a country abandoning the euro within five years, according to a Bloomberg survey. A Greek default is inevitable and there’s a 35 percent chance of the euro-area economy slipping back into recession, Ernst & Young LLP said.

“There is also growing division on what happens with Greece and whether private creditors are set to face more aggressive writedowns,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note.

Default swaps on Germany rose two basis points to 106 and contracts linked to French debt increased four to 182. Italy was up four basis points at 466 and Spanish swaps climbed four to 384. Contracts on Ireland dropped two basis points to 715.

It costs $6.17 million upfront and $100,000 annually to insure $10 million of Greek debt for five years.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 9 basis points to 810, snapping four days of declines, according to JPMorgan. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers dropped two basis points to 264 and the subordinated gauge was down three at 503.

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.

--Editor: Paul Armstrong

To contact the reporter on this story: Michael Shanahan in London at Mshanahan3@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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