Greece Credit Swaps Signal 48% Probability of Default Within Five Years

Greek credit swaps signal a 48.5 percent probability the nation will default within five years after its debt was cut to junk by Moody’s Investors Service.

The cost of insuring $10 million of Greece’s bonds for five years jumped $55,500 to $811,000 a year, making the nation’s debt the third most expensive to protect after Venezuela and Argentina, according to CMA DataVision.

The downgrade of Greece as it struggles to lower a budget deficit that’s four times the European Union limit fueled concern banks of indebted nations will be shut out of capital markets. Francisco Gonzalez, chairman of Spain’s second-largest lender Banco Bilbao Vizcaya Argentaria SA, said yesterday investors have “withdrawn their confidence” from the country.

“This is the biggest crisis capital markets have ever faced,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “There will be more downgrades.”

Greek bonds fell as investors shunned all but the safest assets following the downgrade and Citigroup Inc. said the notes will now be removed from some indexes. The ranking was lowered four steps to Ba1 from A3 by Moody’s, which cited “substantial” risks to economic growth from austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund.

“One cannot have both strong growth and strict fiscal consolidation at the same time,” Tim Brunne, a Munich-based strategist at UniCredit SpA, wrote in a note to investors. “There must be a compromise and this is particularly difficult in the case of Greece.”

SovX Index

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments increased 9 basis points to 150, according to CMA. A basis point on a five-year contract protecting $10 million of debt is equivalent to $1,000 a year.

Contracts on Spain climbed 18.5 basis points to 250.5, Portugal jumped 16 to 318, Italy increased 9 to 200 and Ireland was 15 higher at 254, CMA prices show.

“The credit cocktail is dominated by poisonous sovereign and financial ingredients that look set to keep spreads under pressure,” Jeroen van den Broek, a credit strategist at ING Groep NV in Amsterdam, wrote in a client note.

Spanish banks led an increase in the cost of protecting against losses on financial company bonds, with contracts on Caja Barcelona up 35 basis points to 327.5, Caja Madrid 28 basis points higher at 455 and Banco Pastor SA rising 35.5 to 495.5, CMA prices show.

The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers climbed 2.5 basis points at 169.5, according to JPMorgan Chase & Co.

Investor Sentiment

German investor confidence plunged in June on concern that the sovereign debt crisis will undermine business prospects and crimp growth in Europe’s largest economy.

The Mannheim-based ZEW Center for European Economic Research said today its index of investor and analyst expectations, which aims to predict developments six months ahead, slumped to 28.7 from 45.8 in May. Economists forecast a drop to 42, according to the median of 35 estimates in a Bloomberg News survey.

Five-year contracts on BP Plc jumped 54.5 basis points to 492 and swaps protecting against default for one year surged 81.5 to 632.5, CMA prices show, after Fitch Ratings downgraded the company to BBB from AA.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 2.25 basis points to 128.5, JPMorgan prices show.

Credit-default 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

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