Bloomberg News

Bank Default Risk Declines in Europe on Recapitalization Wagers

October 06, 2011

Oct. 6 (Bloomberg) -- Credit-default swaps insuring European bank debt fell to the lowest in five weeks on speculation policy makers will inject more capital into lenders so they can withstand government bond losses.

The Markit iTraxx Financial Index of swaps linked to senior debt of 25 banks and insurers declined 17.5 basis points to 252 at 12 p.m. in London, while the subordinated gauge was 24 basis points lower at 488, according to JPMorgan Chase & Co. A decline signals improved perceptions of credit quality.

European Commission President Jose Barroso said today the commission is proposing coordinated action to recapitalize banks. Euro-region lenders may need more than 140 billion euros ($187 billion) through a program similar to the U.S. Troubled Asset Relief Program, Morgan Stanley analysts said.

“More bank capital is good, but solving the sovereign debt crisis would go a long way in improving the outlook for Europe’s banks,” Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a note to investors.

Default swaps on sovereign bonds also dropped, with the Markit iTraxx SovX Western Europe Index of contracts tied to 15 governments declining eight basis points to 331.5, according to index administrator Markit Group Ltd. Swaps on German sovereign debt tumbled 11.5 basis points to 96.5, CMA prices show.

The region’s lenders are increasing their reliance on European Central Bank funding after U.S. money-market funds pulled back amid concern that Greece, the first euro-area nation to be bailed out last year, will default.

The cost of insuring European corporate bonds fell, with the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropping 31.5 basis points to 814, according to JPMorgan.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 9.5 basis points at 189.5.

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.

--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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