Bloomberg News

Spanish Bank Downgrades Trigger Surge in Default Swaps to Record

May 18, 2012

The cost of insuring Spanish government and financial debt rose to records after Moody’s Investors Service downgraded 16 of the nation’s banks.

Credit-default swaps on Spain rose five basis points to 556 at 9:25 a.m. in London, after being quoted at an all-time high of 560. Contracts on Banco Bilbao Vizcaya Argentaria SA (BBVA) rose for a sixth day, climbing eight basis points to a record 501, and Banco Santander SA (SAN) increased nine basis points to a six-month high of 452.5.

Bad loans at Spanish lenders are at a 17-year high, the nation’s central bank said today, as a four-year property slump has driven up defaults and heightened investor concern that firms’ balance sheets don’t fully reflect the scale of potential losses. The banks are carrying 184 billion euros ($233 billion) of what the Bank of Spain terms “problematic” real estate- linked assets.

“People are concerned about Spain on its own account and the potential for contagion from something going wrong in Greece,” said Roger Francis, an analyst at Mizuho International Plc in London. “The downgrades can’t possibly be taken as too much of a surprise.”

Swaps on BBVA are up from 240 basis points in February, and Santander is approaching a record 460.5 set Nov. 25. Contracts on Bankia Group, which was taken over by the government on May 9, soared 96 basis points to a record 856. An increase signals deterioration in perceptions of credit quality.

Financial Swaps

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose as much as eight basis points to 313 before being quoted at 305 and the subordinated index jumped as much as 16 to 522 before trading at 513.

The cost of insuring European corporate debt is heading for the biggest weekly increase since November. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose four basis points today to 756, and is up from 686 May 11.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose for a ninth day. It was up two basis points today at 183 basis points, compared with 158 at the end of last week.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose for a sixth day, climbing one basis point to 310.

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.

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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