Bloomberg News

Corporate Bond Risk Rises in Europe Amid Franco-German Divide

October 20, 2011

Oct. 20 (Bloomberg) -- The cost of insuring against default on European corporate debt rose as a split emerged between France and Germany over how to end the region’s debt crisis.

Contracts on the Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-yield credit ratings increased 22.5 basis points to 756.5 basis points, according to JPMorgan Chase & Co. at 4 p.m. in London. An increase signals worsening perceptions of credit quality.

France and Germany are divided over the role of the European Central Bank in bolstering the 440 billion-euro ($604 billion) European Financial Stability Facility. Die Welt reported that the German government hasn’t ruled out postponing the debt-crisis summit scheduled for Oct. 23 in Brussels due to stalling negotiations.

France wants “the ECB to use its balance sheet to boost EFSF funds and for the EFSF to have a banking license. Germany seems to favor the EFSF providing first loss guarantees to boost the funds,” Gary Jenkins, head of fixed income at Evolution Securities in London, said in a note to clients. “Time is running out though and the market will expect some agreement over the weekend.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 7 at 182.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 8.5 basis points to 250.5 and the subordinated gauge was seven higher at 485.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased six basis points to 331 basis points.

Credit-default swaps protecting French debt rose 5.5 basis points to 189.5, contracts on Germany rose three basis points to 90, Italy widened five basis points to 447, and Portugal was 33 basis points higher at 1099, according to CMA.

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: Cecile Gutscher, Michael Shanahan

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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