Bloomberg News

Sovereign, Bank Risk Rises to Record as Europe Crisis Deepens

November 27, 2011

Nov. 25 (Bloomberg) -- The cost of insuring against default on European sovereign and financial company debt rose to records as the euro-region’s crisis deepened with Italy paying the highest yields to sell short-dated bills in 14 years.

The Markit iTraxx SovX Western Europe Index of credit- default swaps linked to 15 governments increased eight basis points to 388. The Markit iTraxx Financial Index on senior debt of 25 banks and insurers was up 14 basis points at 359, according to JPMorgan Chase & Co at 11 a.m. in London.

German Chancellor Angela Merkel’s trenchant opposition to common euro-area bonds and an expanded role for the European Central Bank in fighting the debt crisis is fueling risk aversion. Italy’s Treasury sold 183-day bills at a rate of 6.504 percent, the highest since August 1997, and up from 3.535 percent at the last auction on Oct. 26.

“We are fast running out of options,” Jim Reid, a global investment strategist at Deutsche Bank AG in London, wrote in a note. The great hopes of the last few weeks for Europe have fallen one by one.”

Credit-default swaps protecting French debt rose three basis points to a record 251, contracts on Belgium rose 16 basis points to an all-time high of 411 basis points. Italy widened six basis points to 559.

Swaps on Hungary jumped 32 basis points to 635 after the nation lost its investment- grade rating at Moody’s Investors Service, which cited risks to budget-deficit and public debt targets.

Corporate Swaps

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 16 basis points to 856.5 basis points. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 4.5 at 211.75 basis points. An increase signals worsening perceptions of credit quality.

A basis point on a credit-default swap protecting 10 million euros ($13.3 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, Andrew Reierson

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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