Bloomberg News

Sovereign Default Risk Surges in Europe on Greek Bailout Delay

February 15, 2012

Feb. 15 (Bloomberg) -- The cost of insuring European sovereign debt rose for a sixth day on concern delays to Greece’s bailout are increasing the chance of default.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed 12 basis points to a four-week high of 344 at 3:30 p.m. in London. An increase signals deterioration in perceptions of credit quality.

Officials are considering postponing a full aid package until Greek elections in April, according to the Wall Street Journal, after finance ministers canceled a meeting today because they are unconvinced the nation will stick to austerity pledges. Greece needs the 130 billion-euro ($171 billion) deal, along with about 100 billion euros of debt relief from private bondholders, to avoid an economic collapse next month.

“I can’t see them giving the money,” said Peter Tchir, founder of TF Market Advisors in New York. “Timing is getting tight.”

Antonis Samaras, the leader of Greece’s second-biggest political party, sought to reassure European officials by providing a signed pledge to maintain the “objectives, targets and key policies” of the austerity program. He left open the possibility of “modifications” to Greek policies to promote growth.

“It can’t be easy signing off on lending further cash when you don’t really believe that you are going to get it back,” Gary Jenkins, the director of independent credit firm Swordfish Research in London, wrote in a note to investors.

Corporate Swaps

The cost of insuring corporate and financial debt also rose, according to JPMorgan Chase & Co. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 24 basis points to 624.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5.5 basis points to 143.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased four basis points to 237 and the subordinated index rose 15.5 to 405.5.

A basis point on a credit-default swap protecting 10 million euros 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, Paul Armstrong

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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