Bloomberg News

Netherlands Leads Rise in Sovereign Credit Risk on Deficit Woes

April 23, 2012

Dutch Prime Minister Mark Ruttem right, and Deputy Prime Minister Maxime Verhagen at The Hague on April 21, 2012. Photographer: Phil Nijhuis/AFP/Getty Images

Dutch Prime Minister Mark Ruttem right, and Deputy Prime Minister Maxime Verhagen at The Hague on April 21, 2012. Photographer: Phil Nijhuis/AFP/Getty Images

The Netherlands led an increase in the cost of insuring against default on European sovereign debt to the highest in four weeks as the government offered to resign after lawmakers split over austerity plans.

Credit-default swaps on Dutch bonds jumped 11.5 basis points to 130 at 3:20 p.m. in London, according to data compiled by Bloomberg, the highest in five months. Corporate credit risk also rose as reports showed manufacturing contracted in the euro area and China.

Dutch Prime Minister Mark Rutte offered his cabinet’s resignation after losing support of Geert Wilders’s Freedom Party in his coalition following disagreement over deficit reduction plans. His government’s fall could stifle policy making as euro-region debt rose last year to the highest since the start of the single currency, European Union figures showed.

“There is a danger that we will see a move to more radical, less Europe-friendly policies in the Netherlands,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “A change in the Dutch government raises concern as to whether they will get the budget through and whether they lose their triple A rating which is causing the widening at the moment.”

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments jumped four basis points to 285. An increase signals worsening perceptions of credit quality.

The debt of the 17 euro nations climbed to 87.2 percent of gross domestic product in 2011 from 85.3 percent the previous year, official European Union figures showed. That’s the highest since the euro was introduced in 1999. Greece topped the list with debt at 165.3 percent of GDP, while Estonia had the least at 6 percent of GDP.

Manufacturing Output

Euro-area services and manufacturing output declined for a third month in April as the economy struggled to rebound from a fourth-quarter contraction. A euro-area composite index based on a survey of purchasing managers in both industries fell to 47.4, a five-month low, from 49.1 in March, London-based Markit Economics said in an initial estimate today. Economists had forecast an increase to 49.3.

China’s manufacturing may shrink for a sixth month in April, maintaining pressure on officials to adopt more policies to stimulate economic growth, a survey of companies showed. The 49.1 preliminary reading of the purchasing managers’ index from HSBC Holdings Plc and Markit Economics today compares with a final 48.3 in March. A number below 50 points to a contraction.

Crossover Index

The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increased 22.5 basis points to 695.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings advanced 6.5 basis points to 150.25 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose eight basis points to 263 and the subordinated index jumped 12.5 to 422.5.

A basis point on a credit-default swap protecting 10 million euros ($13.1 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.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

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


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