Bloomberg News

Sovereign, Bank Debt Risk at Record High as Crisis Intensifies

November 24, 2011

Nov. 23 (Bloomberg) -- Credit-default swaps insuring sovereign and bank bonds rose to records amid deepening divisions among European policy makers over how to resolve the region’s worsening debt crisis.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed eight basis points to 373 at 11:30 a.m. in London. Contracts on Belgium, France and Spain rose to all-time highs. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 17 basis points to 338 and the subordinated gauge was up 20 at 585.

The role of European Central Bank as a lender of last resort to struggling governments is proving a dividing line, with Germany resolutely opposed to pledging unlimited funds to cap soaring funding costs. France and Spain have both called for the ECB to underpin the region’s borrowings.

“The house is burning down, we are going to get burnt, so let’s prepare for it,” said Bill Blain, co-head of strategy at broker Newedge Group in London.

Swaps on Belgium climbed 11 basis points to 362, France was up seven at 247 and Spain rose four to 489 basis points. Contracts on Germany increased six to 107 and Italy added 10 to 561 basis points.

Among the banks, default swaps on BNP Paribas SA jumped 19 basis points to 353 and Lloyds TSB Bank Plc increased 19 at 359 basis points.

The cost of insuring corporate debt also increased with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings adding 10 basis points to 813.5 basis points, according to JPMorgan Chase & Co. A rise signals worsening perceptions of credit quality.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 2.5 at 202.25 basis points.

A basis point on a credit-default swap protecting 10 million euros ($13.4 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: Paul Armstrong

To contact the reporter on this story: Michael Shanahan in London at Mshanahan3@bloomberg.net

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


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