Bloomberg News

Sovereign, Bank Risk Rises as Europe Waits on Debt-Crisis Fix

October 24, 2011

Oct. 24 (Bloomberg) -- The cost of insuring against default on sovereign and bank debt rose in Europe as policy makers wrangle over how to contain the region’s debt crisis.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers increased four basis points to 242 according to JPMorgan Chase & Co. at 2 p.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed nine basis points to 333.

Options available to the region’s leaders are narrowing as Greece’s finances deteriorate close to the point of default, threatening to knock the banking system, infect Italy and Spain and weigh on the global economy. A comprehensive bailout package, discussed at weekend meetings, is promised after a summit in two days.

“We were skeptical that a magic solution would be found over the weekend,” Anke Richter, a strategist at Mizuho International in London, wrote in a note. “We expect activity to remain subdued whilst the market watches headlines until Wednesday.”

Credit-default swaps protecting French debt rose four basis points to 190, contracts on Ireland increased 13 basis points to 765, Italy widened four basis points to 444, and Portugal was 36.5 basis points higher at 1,111, according to CMA. An increase signals deteriorating perceptions of credit quality.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped nine basis points to 718. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 0.75 basis point at 175.5.

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: Michael Shanahan, Paul Armstrong

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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