Bloomberg News

U.S. Company Credit Risk Climbs Amid Discord on Europe Bailout

October 20, 2011

Oct. 20 (Bloomberg) -- A benchmark gauge of U.S. corporate credit risk rose for a second day as European leaders disagreed on plans to increase the region’s bailout fund and protect banks from a potential Greek default.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.2 basis points to a mid- price of 135.6 basis points at 12:40 p.m. New York time, according to index administrator Markit Group Ltd. Credit- default swaps on Credit Agricole SA increased 12 basis points to 244.5 as of 11 a.m., while those on Bank of America Corp. jumped 25.7 basis points to 378.2, according to data provider CMA.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has climbed from 132.7 basis points on Oct. 18 as discord has emerged over plans to stop the spread of the region’s debt crisis by offering credit lines to Spain and Italy. German Chancellor Angela Merkel canceled a speech to parliament scheduled for tomorrow because of a deadlock over the proposals, according to lawmakers.

“What we have now is a crisis of confidence which creates a crisis of liquidity,” Scott Stengel, a partner who specializes in banking law at King & Spalding LLP, said in an interview today with Pimm Fox on Bloomberg Television’s “Surveillance Midday.” “There’s nothing worse for financial institutions.”

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, Mitchell Martin

To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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