Bloomberg News

Corporate Bond Risk Falls in Europe Before Debt-Crisis Summit

October 21, 2011

Oct. 21 (Bloomberg) -- The cost of insuring against default on European corporate debt fell on speculation lawmakers may unleash as much as 940 billion euros ($1.3 trillion) to fight the region’s debt crisis.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings declined 30.5 basis points to 727, according to JPMorgan Chase & Co. at 4:30 p.m. in London.

Policy makers are considering combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, two people familiar with the discussions said. Finance ministers meet in Brussels today to lay the groundwork for meetings of government leaders.

“We have another three days to wait before the ‘Grand Plan’ becomes apparent,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We will still watch out for any fresh European headlines over the weekend but markets will have to wait a little longer before a deal is agreed.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 7.5 basis points to 175.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 15 basis points to 239 and the subordinated index was 23 lower at 472.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments fell nine basis points to 324. A decrease signals improving perceptions of credit quality.

Credit-default swaps protecting French debt fell three basis points to 186, contracts on Germany declined one basis point to 90, Italy narrowed 15 basis points to 441, and Portugal was 43 basis points lower at 1077, according to CMA.

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.

--Editor: Michael Shanahan

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

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


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