Jan. 31 (Bloomberg) -- The risk of companies defaulting rose as negative ratings actions by Standard & Poor's on $534 billion of mortgage-linked securities and a record loss at bond insurer MBIA Inc. reinforced concern that financial markets will worsen.

Contracts on the benchmark Markit CDX North America Investment Grade Index rose 2.5 basis points to 110 at 10:23 a.m. in New York, according to Deutsche Bank AG. Europe's Markit iTraxx Crossover Index jumped 27 basis points to 477, JPMorgan Chase & Co. prices show. In Asia, the Markit iTraxx Japan index rose 6 basis points to 70.

S&P said its review of debt securities linked to home loans sold to people with weak credit may cause bank losses to exceed $265 billion and have a ``ripple impact'' on financial markets. MBIA, the biggest bond insurer, reported a fourth-quarter net loss of $2.3 billion, fueling concern that it will be stripped off its AAA credit rating, throwing doubt on the value of $652 billion of securities the company guarantees.

``A lot of investors remember what happened the last time we had a pretty broad-based downgrading of those securities,'' said Ashish Shah, head of credit strategy at Lehman Brothers Holdings Inc. in New York. ``We fully expect to see more writedowns.''

Downgrades last year of subprime mortgage-linked securities caused the world's biggest banks and securities firms to announce at least $133 billion in credit losses and asset writedowns.

Banks and securities firms including New York-based Citigroup Inc. and Merrill Lynch & Co. accounted for most of the latest writedowns, S&P said yesterday. The next round will be borne mainly by smaller financial institutions in the U.S., Europe and Asia, the New York-based ratings firm said.

Wachovia, Wells Fargo

Credit-default swaps on Wachovia Corp., the fourth-largest U.S. bank, climbed 10 basis points to 130 basis points, according to broker Phoenix Partners Group in New York. Wells Fargo & Co., the biggest bank on the West Coast, rose 7 basis points to 72.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

``The market has accounted for only half'' of the losses predicted by S&P, said Mehernosh Engineer, a credit strategist at BNP Paribas in London. ``The question is, `Where are the rest of the losses?'''

Credit-default swaps on MBIA's bond insurance unit widened 37 basis points to 483 basis points, according to CMA Datavision. Contracts on Ambac Financial Group Inc.'s bond insurer, the second-biggest, rose 35 basis points to 440, according to CMA.

Contracts on Philadelphia-based mortgage insurer Radian Group Inc. rose 20 basis points to 825 basis points.

CDO Losses

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They 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. A rise indicates worsening perceptions of credit quality; a decline, the opposite.

MBIA, which started as the Municipal Bond Insurance Association in 1974, is reeling from an expansion into guaranteeing collateralized debt obligations. ratings companies are pressing the insurers to add more capital.

MBIA, based in Armonk, New York, said it lost $3.4 billion marking down the value of residential and commercial mortgages as well as CDOs it guarantees. CDOs are created by packaging assets including bonds, loans or credit-default swaps and using their income to pay investors. The securities are divided into different portions of varying risk, offering a range of returns.

$41 Billion Losses

Bond insurers guarantee $2.4 trillion of debt and are sitting on losses of as much as $41 billion, JPMorgan analysts Chris Flanagan and Kedran Garrison Panageas said in a research report on Jan. 25. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.

New York-based Ambac, the second-biggest bond insurer, was stripped by Fitch Ratings last week of the top AAA credit ranking it depends on to guarantee $556 billion of bonds. Financial Guaranty Insurance Co., the fourth-largest, was cut two levels to AA by Fitch yesterday after missing a deadline to raise capital.

Contracts on Merrill Lynch & Co., the world's largest brokerage, increased 10 basis points to 155, Phoenix Partners Group prices show. Credit-default swaps on securities firm Bear Stearns Cos. rose 12 basis points to 255.

Subprime Bonds

Almost half the subprime bonds rated by S&P in 2006 and early 2007 were cut or placed on review, potentially forcing credit unions and government-sponsored enterprises such as Fannie Mae and Freddie Mac to write down their holdings, the firm said. About 35 percent of CDOs comprised of asset-backed securities were put under review, S&P said.

Credit markets extended the slump today after government reports on unemployment and consumer spending aggravated concerns that the U.S. economy is slipping into recession.

The number of Americans filing first-time claims for unemployment benefits rose 69,000 to 375,000 last week, a 27- month high, the Labor Department said. Consumer spending increased 0.2 percent in December, the slowest pace in six months, the Commerce Department said in a separate report.

The Federal Reserve yesterday cut its benchmark interest rate by half a percentage point to 3 percent, eight days after an emergency three-quarter point reduction.

``We've now gotten 125 basis points out of the Fed, and it's unlikely if you have a market selloff that the Fed intervenes again in the same week,'' Shah said in an interview.

The Markit LCDX index, a gauge of confidence in the U.S. high-yield, high-risk loan market that falls as sentiment worsens, dropped 0.35 point to 92.9, according to Goldman Sachs Group Inc.

Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 5.25 basis points to 79, JPMorgan prices show.

To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: January 31, 2008 11:07 EST