Bloomberg News

Spain, Italy Lead Drop in Government Default Swaps in Europe

December 20, 2011

Dec. 20 (Bloomberg) -- Spain and Italy led a decline in the cost of insuring against default on government debt before the European Central Bank starts offering three-year loans tomorrow.

Credit-default swaps on Spain dropped 21 basis points to 387 and Italy tumbled 31 to 504, according to CMA prices at 4 p.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 11 basis points to 359.

Investors are betting the ECB’s longer-term refinancing operation will spur demand for Spanish and Italian debt to use as collateral for loans. A gain in German confidence, a successful Spanish bill sale and U.S. housing data that beat economists forecasts also helped boost confidence.

“So the market has completely latched on to the idea that LTRO is back-door” quantitative easing, Peter Tchir, the founder of TF Market Advisors in New York, wrote in an email. “The bull case would have banks buying lots of European sovereign debt with this program.”

The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 31.5 basis points to 772.5, according to JPMorgan Chase & Co. A decline signals improvement in perceptions of credit quality.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 7.5 basis points to 179.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 17 basis points to 298 and the subordinated index dropped 15 to 540.

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.

--Editor: Michael Shanahan

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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