Bloomberg News

European Bank Bond Risk Falls to 3-Month Low on Crisis Accord

October 27, 2011

Oct. 27 (Bloomberg) -- The cost of insuring against default on European bank debt plunged to a three-month low as the region’s leaders agreed on plans to bolster lenders’ capital as part of a strategy to stem the debt crisis.

The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers including Credit Suisse Group AG and BNP Paribas SA fell 32.5 basis points to 209, the lowest since Aug. 4, JPMorgan Chase & Co. prices at 1 p.m. in London show. The gauge, which falls as perceptions of credit quality improve, rose to a record 314 on Sept. 12.

European leaders’ talks in Brussels yielded an agreement to boost the region’s rescue fund and for bondholders to take a 50 percent loss on their Greek holdings. Banks will also need to raise money to insulate themselves against losses, though details of what assets count as capital and whether future borrowing will be state guaranteed are still to be decided.

“The fall in banks’ CDS does seem paradoxical, but it will be accompanied by recapitalization so it’s not just a one-way street,” said Orlando Green, a fixed-income strategist at Credit Agricole CIB in London.

Europe’s banks will need to raise 106 billion euros in fresh capital under tougher rules introduced in response to the crisis, the European Banking Authority said yesterday. The lenders have until Dec. 25 to submit their plans for raising the money to national supervisors.

Banks, Insurers

Credit-default swaps on Credit Suisse, Switzerland’s second-largest bank, narrowed 15.5 basis points to 135, and BNP Paribas fell 25 to 212.5, according to CMA. RSA Insurance Group Plc dropped 15 basis points to 129 and Hammerson PLC was 17 lower at 170.

The Markit iTraxx Financial Index of banks’ subordinated debt tumbled 54 basis points to 415, JPMorgan prices show.

“The positive reaction is after yesterday’s speculation that no agreement on a Greek haircut could be found,” said Annalisa Piazza, a fixed-income strategist at Newedge Group in London. “Some details are still missing but the market seems to like the wide set of measures that tackle all the main short- term risks.”

Europe’s crisis-fighting package also eased the risk of holding sovereign debt, with the Markit iTraxx SovX Western Europe Index dropping to the lowest since Sept. 1. The gauge of credit-default swaps on 15 governments dropped 34 basis points to 300, its steepest decline since May 11.

France, Italy

Credit-default swaps on France fell 22 basis points to 166, the lowest since Sept. 16, according to CMA. Contracts on Italy fell 32 basis points to 425, Spain dropped 33 to 346 and Portugal fell 92 basis points to 1,016.

The upfront price to insure $10 million of Greek bonds for five years dropped to $5.5 million from $6 million yesterday, CMA data show.

The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 68 basis points to 652 basis points, and the Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 21 at 154 basis points.

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.

--Editors: Andrew Reierson, 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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