Bloomberg News

Sovereign Credit-Default Swaps Decline as Crisis Bets Pared

December 16, 2011

Dec. 16 (Bloomberg) -- The cost of insuring against default on European sovereign debt fell for a second day as investors pared bets the region’s crisis is worsening.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments declined 9.5 basis points to 365 at 2:30 p.m. in London, the biggest drop in more than two weeks. A decline signals improvement in perceptions of credit quality.

Markets extended yesterday’s rally, which was triggered by a successful Spanish government bond auction and U.S. data that signaled the world’s biggest economy is strengthening. Sovereign swaps approached a record earlier this week as cracks emerged in last week’s agreement to resolve the debt crisis and investors braced for the region’s strongest economies to lose their top credit ratings.

“There’s improvement in sentiment across the board,” said Brian Barry, an analyst at Evolution Securities Ltd. in London. “Whether it will last is another question, given European sovereign downgrades are on the horizon and the conclusions from last week’s summit do not exactly look to be water tight. There is significant risk that things could turn the opposite direction.”

Italian Swaps

The sovereign gauge has soared from 207.5 basis points so far this year and is little changed on the week and month. Credit-default swaps on Italy dropped 23.5 basis points to 534 and Spain fell 24 to 409, according to CMA.

The cost of insuring financial debt also fell as Credit Agricole SA, France’s second-largest bank by assets, and Old Mutual Plc, the third-biggest U.K. insurer, announced deals to sell assets.

Credit Agricole is selling its private-equity unit to Coller Capital for an undisclosed sum to boost capital. Old Mutual said yesterday it’s selling its Nordic unit to Skandia Liv for 2.1 billion pounds ($3.3 billion) to reduce debt and return capital to investors.

“At a time when every bank is deleveraging and trying to sell assets, the fact that Old Mutual was able to sell its Nordic assets at a decent price is a good sign,” Barry said. “More transactions are going through and that helps generate a bit of confidence.”

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased three basis points to 312 and the subordinated index dropped 6.5 to 556, both the lowest in a week, according to JPMorgan Chase & Co.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased one basis point to 789.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.75 basis point to 185 basis points.

A basis point on a credit-default swap protecting 10 million euros ($13 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: Abigail Moses in London at

To contact the editor responsible for this story: Paul Armstrong at

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