Bloomberg News

Bond Risk Surges as Greece Triggers Disorderly Default Concerns

November 02, 2011

Nov. 1 (Bloomberg) -- The cost of insuring against default on European debt surged the most in almost four months on concern a referendum on Greece’s bailout package may push the country into a disorderly default.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 27 basis points to 331 at 11 a.m. in London. An increase signals worsening perceptions of credit quality.

Greek Prime Minister George Papandreou called the referendum and a parliamentary confidence vote after austerity measures he promised in return for aid sparked a wave of social unrest. The move triggered a reversal of the rally sparked by last week’s agreement to boost the region’s rescue fund.

“It is a political gamble which adds further uncertainty to the European debt crisis,” Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a note. “It raises the prospect of a disorderly default and an exit from the EU.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 67 basis points to 726 basis points, according to JPMorgan Chase & Co.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 18.25 at 180.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 30 basis points to 257 and the subordinated gauge was 53 higher at 480.

A basis point on a credit-default swap protecting 10 million euros ($13.7 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: Andrew Reierson

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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