Spreading European Fiscal Deficit Crisis Hurts Bank Swaps: Credit Markets

Signs the global economic recovery is faltering and Europe’s fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they’re owed by that region’s most indebted nations.

The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points to 167, compared with the record-high 174.4 reached on June 4.

Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. data. A U.S. jobs report at the end of last week fell short of economists’ forecasts, while a spokesman for Hungary’s prime minister said it was “no exaggeration” to suggest the eastern European nation may default.

“The market is so volatile right now, it’s ready to blow up on any headline no matter how meaningful it should be,” said Aziz Sunderji, a credit strategist at Barclays Capital in London. “People are extremely risk-averse.”

Photographer: Balint Porneczi/Bloomberg

The Hungarian National Bank stands in Budapest. Close

The Hungarian National Bank stands in Budapest.

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Photographer: Balint Porneczi/Bloomberg

The Hungarian National Bank stands in Budapest.

Italy needs 1.07 trillion euros by 2013 to refinance debt coming due, Spain must raise 546 billion euros and Greece needs 152.6 billion euros, according to a Bank of America estimate in May. Portugal and Ireland each have to raise about 80 billion euros, the data show.

Risk Indexes Rise

Elsewhere in credit markets, JPMorgan Chase & Co. is marketing $716.3 million of bonds backed by commercial mortgages. Triumph Group Inc. plans to sell $350 million of eight-year notes as soon as tomorrow. Freddie Mac, the mortgage- finance company with U.S. government support, plans to sell about $1 billion of securities backed by loans on multifamily properties.

Broader credit-default swaps indexes in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index climbed 2.46 basis points to a mid-price of 128 basis points as of 12:31 p.m. in New York, the highest since March 23, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies increased 9.6 basis points to a mid-price of 135.38, Markit data show. Both indexes typically rise as investor confidence deteriorates and fall as it improves.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Commercial Mortgage Debt

The JPMorgan transaction, which is the second of newly issued commercial-mortgage backed bonds to be sold this year, consists of 36 loans on 96 properties, said the person, according to a person familiar with the sale who declined to be identified because terms aren’t public.

Sales of commercial-mortgage backed securities halted in 2008 as credit markets froze, choking off funding to property borrowers. Even with government aid, only $3.04 billion of the debt was issued last year, compared with $11.2 billion in 2008 and a record $232.4 billion in 2007, according to data compiled by Bloomberg. Royal Bank of Scotland Group PLC sold $309.7 million of the bonds in April. During the boom, sales grew as large as $7.6 billion, the data show.

Debt from Triumph, the Wayne, Pennsylvania-based maker of aircraft components, may yield 8.5 percent to 8.75 percent, according to a person familiar with the offering. Moody’s Investors Service assigns Triumph a Ba2 corporate family rating. Standard & Poor’s rated the proposed offering B+.

Freddie Mac

The Freddie Mac debt, which will be the third of six such transactions that the McLean, Virginia-based company expects this year, is likely to be sold around June 11, according to an e-mailed statement.

Investors will be protected against default on the underlying mortgages by a Freddie Mac guarantee and by credit protection created by the deal’s structure, the company said. Bank of America and Deutsche Bank AG will lead the underwriting, according to the statement.

In emerging markets, the extra yield investors demand to own corporate debt instead of government securities widened 2 basis points to 334 basis points, or 3.34 percent, according to JPMorgan’s EMBI+ Index. Spreads have tightened from this year’s high of 346 basis points on May 20.

Argentine bonds declined for a second straight day. The yield on Argentina’s 8.28 percent dollar bond due in 2033 rose 5 basis points to 13.01 percent. The price fell 0.25 cents to 64.93 cents on the dollar.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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