Bloomberg News

Bank Bond Risk Increases as Finance Ministers’ Meeting Canceled

October 25, 2011

Oct. 25 (Bloomberg) -- The cost of insuring against default on European bank debt rose as a meeting of European Union finance ministers scheduled for tomorrow was canceled and U.S. consumer confidence unexpectedly fell.

The Markit iTraxx Financial Index of credit-default swaps linked to senior debt of 25 banks and insurers increased 7.5 basis points to 242 and the subordinated gauge was six basis points higher at 474, according to JPMorgan Chase & Co. at 4 p.m. in London.

The cancellation prompted concern that a separate EU leaders’ summit will fail to agree on a deal to resolve the region’s debt crisis. U.S consumer confidence slumped to 39.8 in October from a revised 46.4 reading in September, the lowest level since March 2009, the Conference Board’s sentiment index showed.

“A complete blow up of the summit will be taken as a disaster from the market,” said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam. “I think the full package will not be ready for tomorrow. There are too many details to define.”

The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings climbed six basis points to 714, according to JPMorgan. An increase signals a deterioration in perceptions of credit quality.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2.5 basis points to 175 basis points. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 4.5 basis points to 335.

A basis point on a credit-default swap protecting 10 million euros ($13.9 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, 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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