Bloomberg News

Bond Risk Falls Before EU Leaders Meet to Tackle Greek Crisis

May 22, 2012

The cost of insuring sovereign and corporate debt fell on speculation European Union leaders meeting in Brussels tomorrow will take steps to shore up the euro and prevent Greece’s crisis from deepening.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments fell for the first time in eight days, dropping five basis points to 311 at 9:40 a.m. in London. A decline signals improvement in perceptions of credit quality.

EU leaders will do “everything necessary” to keep Greece in the euro, German Finance Minister Wolfgang Schaeuble said yesterday, even as Chancellor Angela Merkel and French President Francois Hollande prepare to disagree over methods. Europe’s debt crisis risks spiraling and seriously damaging the world economy, the Organization for Economic Cooperation and Development said today.

“As we’ve learned over the past two years, risk rallies ahead of EU summits are not uncommon but for it to be sustained we will likely need actionable policy announcements,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “Direct bank recapitalizations from the ESM, a path towards euro bonds and a pan-European bank deposit guarantee are the main hopes.”

Swaps on Spain tumbled 18 basis points to 537, after climbing to a record yesterday, Italy declined 14 to 498 and Ireland fell five to 717.

Corporate Risk

Corporate and financial bond risk fell for a second day. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 22 basis points to 721, the lowest in more than a week. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell six basis points to 174.5 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell 10 basis points to 288.5 and the subordinated index declined 18 to 488.

A basis point on a credit-default swap protecting 10 million euros ($12.8 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: 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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