Bloomberg News

Europe Corporate Debt Risk Erases Drop on German Crisis Warning

October 17, 2011

Oct. 17 (Bloomberg) -- The cost of insuring against default on European corporate debt erased its declines after Germany said policy makers won’t come up with a complete fix to the debt crisis at this weekend’s summit.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings rose 1.75 basis points to 174.75, according to JPMorgan Chase & Co. at 4:30 p.m. in London, after earlier falling to as low as 167. An increase signals a deterioration in perceptions of credit quality.

Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, said that the search for an end to the crisis that has forced three countries to seek international bailouts will extend into 2012. Credit markets rallied earlier after Group of 20 finance ministers and central banks concluded weekend talks in Paris by setting an Oct. 23 deadline for a plan to bolster banks and curb contagion.

“Markets continue to expect too much,” Marchel Alexandrovich, an economist at Jefferies International Ltd. in London, said in an e-mail. “We’ve been here before where expectations get too unrealistic and take a hit. The markets are realizing that the European crisis won’t get resolved in a week’s time after all.”

The Markit iTraxx Crossover Index linked to 50 European companies with mostly high-yield credit ratings climbed 0.5 basis point to 740, after earlier declining to 709, JPMorgan prices show. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 1.5 basis points to 243.5, while the subordinated gauge pared its drop, falling 10 basis points to 470.

Sovereign Risk

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped two basis points to 334.5, also paring its decline.

Credit-default swaps protecting Irish debt fell 10 basis points to 748, contracts on Italy slipped nine basis points to 442, Portugal dropped 34 basis points to 1,107, and Spain was five basis points lower at 377, according to CMA.

Swaps on France were little changed at 182, Germany declined three basis points to 92 and Belgium fell from a record, dropping 14 basis points to 296, CMA prices show.

A basis point on a credit-default swap protecting 10 million euros ($13.8 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: Paul Armstrong, Cecile Gutscher

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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


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