Bloomberg News

Spain Default Swaps at Record as Europe Bond Risk Rises

June 01, 2012

Spanish Economy Minister Luis de Guindos

Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain as data showed record levels of capital leaving his country. Photographer: Jock Fistick/Bloomberg

The cost of insuring against a default on Spanish government bonds rose to a record as the nation’s debt crisis deepened.

Credit-default swaps linked to Spain’s notes climbed nine basis points to 609 at 10:40 a.m. in London, according to data compiled by Bloomberg. Swaps on Telefonica (TEF) SA, the nation’s biggest phone company, climbed 13 basis points to an all-time high of 481.

Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain as data showed record levels of capital leaving his country. The International Monetary Fund denied it was preparing financial aid for Spain.

“It’s important that any support for Spain allows it to maintain market access as a full-blown bailout would pretty much exhaust bailout funds,” Elisabeth Afseth, an analyst at Investec Bank Plc in London, said in a note. “The most likely path to achieve this is to separate banking and sovereign support.”

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed three basis points to 328.75, adding to the gauge’s 50 basis-point jump in May. Swaps on Italy climbed 14 basis points to 575, approaching the record 602 basis points on Nov. 15, Bloomberg data show. An increase signals worsening investor perceptions of credit quality.

Telefonica Risk

Swaps on Telefonica climbed after the company said it will explore share sales for O2 Germany and its Latin American businesses as part of attempts to cut its net debt of more than 57 billion euros ($70 billion). Standard & Poor’s cut the Madrid-based company’s ratings to two levels above junk last week. Junk, or speculative-grade, debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P.

The cost of insuring bank debt also increased, with the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rising 3.5 basis points to 300, after surging 23 percent last month. The subordinated bank-swaps index increased 2.5 basis points to 495.5.

The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increased seven basis points to 727, after a 69-point rise in May. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings advanced 2.5 basis points to 181.5.

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.

To contact the reporter on this story: Michael Shanahan in London at mshanahan3@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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