Greek Bond Risk Jumps to Record on Signs Europe's Recovery is Sputtering

The cost to insure Greek government bonds against default jumped to a record on speculation the slowing economic recovery will add to the country’s debt woes.

Credit-default swaps on Greece rose 145 basis points to an all-time high of 1,077 basis points, according to CMA DataVision. Contracts on Portuguese government securities climbed 16 basis points to a two-week high of 336.5, while Spain rose 4 to 269.

Greek bond risk rose as data showed European industrial orders rose less than expected in April, following a report yesterday that showed growth in the region’s services and manufacturing industries slowed in June. Moody’s Investors Service downgraded Greece to junk last week, citing the risk to economic growth from austerity measures tied to a 110 billion- euro ($164.7 billion) rescue package.

“Some type of restructuring is likely inevitable,” said Eric Stein, a portfolio manager for Eaton Vance’s Global Macro Absolute Return Fund, which in 2005 bought credit swaps on $50 million of Greek debt with an annual premium of $99,000 for 15 years, according to regulatory filings. The fund still owned credit swaps on Greece as of March 31, according to its website. “It’s very tough, in the long-term, to service their debt in its current form,” he said.

The extra yield investors demand to hold 10-year Greek debt instead of benchmark German bunds rose 10 basis points to 782 basis points. That’s the most since May 7, before the aid package was announced.

Greek bonds are the worst performers in the euro region this year, falling 19 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds returned 6.5 percent.

Fiscal Leeway

Petros Christodoulou, head of Greece’s debt agency, said today that the European Union loan package is giving the country leeway to focus on its fiscal-consolidation measures and there’s no reason to expect a default.

“The package we received gives us the luxury not to think about it at this stage,” Christodoulou said at “The Sovereign Debt Briefing” in London hosted by Bloomberg Link. “No one at the moment is looking at a restructuring in Greece, no one in Greece, no one outside Greece.”

European industrial orders rose 0.9 percent from March, the European Union’s statistics office in Luxembourg said today. Economists had forecast orders to increase 1.6 percent, estimates in a Bloomberg News survey showed.

Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings increased 16 basis points to 563.5, JPMorgan Chase & Co. prices show. The Markit iTraxx Europe Index of 125 investment-grade companies rose 4 to 129.9.

A basis point on a credit-default swap contract protecting 10 million euros ($12.3 million) of debt from default for five years is equivalent to 1,000 euros a year.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

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