Jan. 25 (Bloomberg) -- The risk of European companies defaulting headed for the biggest weekly decline in almost two months amid speculation bond insurer Ambac Financial Group Inc. will be bought by billionaire Wilbur Ross.

Credit-default swaps on HSBC Holdings Plc, Europe's biggest bank by market value, dropped 9 basis points to 58, after trading as high as 92 on Jan 22. Hannover Re, Germany's second- biggest reinsurer declined 9 to 54 as of 11 a.m. in London. The benchmark Markit iTraxx Europe index fell 3 basis points to 70, down from a record 92 basis points on Jan. 22, according to JPMorgan Chase & Co.

Ambac, the second-biggest bond insurer, was stripped of the top AAA credit ranking it depends on to guarantee $556 billion of bonds after being downgraded by Fitch Ratings last week. Ross, who became a billionaire by turning around distressed steel and textile businesses, said this week he was ``looking at'' the so-called monoline insurers. The Evening Standard in London reported yesterday Ross is in talks to acquire New York- based Ambac.

``The monolines will get bailed out because not doing so would create a far worse situation,'' said Jim Reid, head of fundamental credit research at Deutsche Bank AG in London. ``If left to free markets these credit markets would unravel in the worst way we have every seen.''

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.

Insurers Stumble

Ambac and Armonk, New York-based MBIA Inc., the biggest of the bond insurers, may be downgraded by Moody's Investors Service and Standard & Poor's because of losses on collateralized debt obligations and subprime mortgages. CDOs, which are used to package bonds and loans, accounted for the biggest portion of the $133 billion in writedowns and credit losses since the beginning of 2007 at more than 20 of the world's largest financial firms.

New York's Insurance Superintendent Eric Dinallo met with executives of banks and securities firms this week to ask them to extend capital to bond insurers and stave off credit rating reductions. The regulator said yesterday its rescue plan will ``take some time.''

Capital Injection

A $200 billion capital injection may be needed for the monolines to retain their AAA credit ratings, dwarfing the $15 billion sought by the regulators, the Times in London reported today, citing Sean Egan of Egan-Jones Ratings Co.

The Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 11 basis points to 437, according to JPMorgan.

The Markit CDX North America Investment Grade Index closed 10 basis points lower at 99.75 in New York yesterday, according to Deutsche Bank.

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.

To contact the reporters on this story: Hamish Risk in London hrisk@bloomberg.net

Last Updated: January 25, 2008 06:49 EST