Bloomberg News

Default Swaps in U.S. at Year’s High on Spain Bank Cuts

May 17, 2012

A gauge of corporate credit risk rose to the highest level this year as Moody’s Investors Service cut Spanish banks’ credit ratings and on signs the U.S. job market was making little progress.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 4 basis points to a mid-price of 122.9 basis points at 4:47 p.m. in New York, according to prices compiled by Bloomberg. The index last touched a higher intra-day level on Dec. 22.

Investors pushed the measure higher on concern that Europe’s intensifying debt crisis may infect the financial system and curb global economic growth, forcing weaker borrowers to miss debt payments. U.S. jobless claims of 370,000 for the week ended May 12 were more than the 365,000 forecast by economists in a Bloomberg News survey, Labor Department figures showed today in Washington.

“You always hope that job growth in America would be enough to get escape velocity and unleash the world into growth,” said Marc Gross, a money manager at RS Investments in New York. “The numbers we are seeing are not enough to make up for the malaise in the rest of the world.”

’Market Stress’

In Europe, Moody’s downgraded by one to three levels the ratings of 16 Spanish banks and Santander UK Plc. The move primarily reflects the banks’ “standalone credit assessments” and in five cases, the Spanish government’s reduced ability to support them, the ratings firm said in a statement.

The swaps index, which typically increases as investor confidence deteriorates, has jumped by more than 25 basis points this month on uncertainty whether Greece will remain in the euro as the country prepares for another round of elections.

“With still a month to go before the next Greek elections, we see further room for market stress to build,” Credit Suisse Group AG analysts led by David Homan said in a research note. That process has been “amplified by a well-advertised synthetic credit position gone bad,” they wrote.

JPMorgan Chase & Co. (JPM:US) announced trading losses of $2 billion last week after its chief investment office took flawed positions on “synthetic credit.” It may cost the lender an additional $1 billion this quarter or next, Chief Executive Officer Jamie Dimon said on a May 10 conference call with analysts.

The swaps contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Sridhar Natarajan in New York at

To contact the editor responsible for this story: Alan Goldstein at

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