Bloomberg News

Morgan Stanley, Citigroup Credit Swaps Fall on Europe Optimism

October 06, 2011

Oct. 6 (Bloomberg) -- The cost to protect the debt of Morgan Stanley and Citigroup Inc. declined as optimism grew that Europe’s leaders may be able to prevent a sovereign debt crisis from infecting bank balance sheets.

Credit-default swaps on the owner of the world’s biggest retail brokerage fell 56 basis points to 474 and those on Citigroup 45 basis points to 300, the biggest one-day decline since May 2009, according to data provider CMA. Swaps on Goldman Sachs Group Inc. eased 23 basis points to 374, the data show.

Investor confidence in bank debt is rebounding as European Central Bank President Jean-Claude Trichet said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks. The European Commission is pushing for a coordinated capital injection for banks to shield them from the fallout of a potential Greek default.

“This is a rally off the bottom that reflects a greater degree of confidence that there will be a constructive solution for the banks in Europe,” said Allerton Smith, senior director of the capital markets research group at Moody’s Corp. For Morgan Stanley, whose default swap levels surged as high as 650 basis points on Oct. 4, according to broker Phoenix Partners Group, “market participants have come to the conclusion that the extra wide spread levels were an overreaction to some half- baked facts,” Smith said.

Contracts on Charlotte, North Carolina-based Bank of America Corp. declined 52 basis points to 399, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the biggest one-day drop on record on a closing basis, according to data compiled by Bloomberg that goes back to 2004. Contracts on General Electric Capital Corp., the financing arm of General Electric Co., fell 31 basis points to 302.

The average credit-default swap on the six biggest U.S. banks had climbed for five trading days through Oct. 4 as concern intensified that Europe’s debt crisis will contaminate the global banking system and halt already slowing U.S. economic growth.

Index Falls

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 5.8 basis points to a mid-price of 139.3 as of 5:01 p.m. in New York, according to index administrator Markit Group Ltd. The index, which typically falls as investor confidence improves and rises as it deteriorates, reached as high as 154.1 on Oct. 4.

Bonds of New York-based Morgan Stanley have dropped since August and the cost to protect its debt has surged amid concern that sovereign defaults would spread to U.S. banks.

“Both capital and liquidity nearly doubled from pre-crisis levels and should be sufficient to manage through current market conditions,” CreditSights analysts led by David Hendler in New York wrote in a report yesterday. The market reaction was “mainly due to undue perceptions of its exposure to European sovereigns and banks,” they wrote.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--Editors: John Parry, Pierre Paulden

To contact the reporter on this story: Mary Childs in New York at

To contact the editor responsible for this story: Alan Goldstein at

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