Bloomberg News

Bank Default Swaps Surge as Bigger Losses on Greek Debt Loom

October 04, 2011

Oct. 4 (Bloomberg) -- Credit-default swaps insuring bank debt surged after European lawmakers signaled lenders may have to take bigger losses on holdings of Greek debt.

The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers jumped 16.5 basis points to 305.5 and the subordinated index climbed 25 to a record 567, according to JPMorgan Chase & Co. at 1:30 p.m. in London. An increase signals deteriorating perceptions of credit quality.

Luxembourg Prime Minister Jean-Claude Juncker signaled finance ministers are considering reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro Greek rescue with debt exchanges and rollovers. The leaders are struggling to prevent the crisis engulfing the rest of the region.

“It is going to be challenging to persuade the banks to take a bigger hit at this stage when they are already under such pressure,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “Any larger Greek write off will no doubt encourage investors to revisit valuations for the likes of Portugal, Italy etc. which in turn will put the banks under more pressure.”

Credit-default swaps on Germany rose four basis points to an all-time high of 122 and France increased nine to 199, approaching the record closing price of 202.5 on Sept. 22, according to CMA. French and German banks have the biggest holdings of Greek debt, according to the Basel, Switzerland- based Bank for International Settlements.

Deutsche Bank

Deutsche Bank AG swaps jumped 19 basis points to 210 after saying the planned operating pretax profit target of 10 billion euros from its core businesses for 2011 is no longer achievable.

Swaps on France’s three biggest banks also rose, with Societe Generale SA up 26 basis points at 378, Credit Agricole SA 19 higher at 282 and BNP Paribas SA up 18 to 281, according to CMA.

“Currently the tensions are such that we could see forced sellers, with some banks needing to de-risk sharply,” said Alberto Gallo, head of European credit strategy at Royal Bank of Scotland Group Plc in London. “There’s a lot of counterparty hedging activity in CDS, which goes back to the fact that in Europe, banks own bank bonds.”

Swaps on Belgium jumped 22 basis points to 293.5, Italy rose nine to 480 and Portugal climbed 24 to 1,134, while Spain was seven higher at 387, all nearing records set last month. Ireland rose 21 basis points to 717, CMA prices show.

It costs $6.14 million in advance and $100,000 annually to insure $10 million of Greek debt for five years. That signals a greater than 90 percent probability of default, assuming investors would recover 32 percent of their holdings, according to CMA.

Sovereign Swaps

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 11 basis points to 353.

The cost of insuring corporate debt also increased. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings jumping as much as nine basis points to 215.5, surpassing the December 2008 record closing price of 215, before trading at 215, JPMorgan prices show.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 34.5 basis points to 892.5, the highest since April 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.

--Editors: Michael Shanahan, Andrew Reierson

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


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