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Sovereign Bond Default Risk Tumbles in Europe on Ireland Bailout Wagers

The cost of insuring against losses on European government bonds fell on speculation pressure from euro-region central bankers will force Ireland to accept an international bailout that would calm markets.

Credit-default swaps on Irish government debt fell for a third day, dropping 58.5 basis points to 488, the lowest level since Oct. 29, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 8.5 basis points to 160.

“Three words: Waiting for Ireland,” said Suki Mann, a credit strategist at Societe Generale SA in London. “Until there’s any concrete news, investors will stay sidelined.”

Pressure is mounting on Ireland to follow Greece in turning to the European Union’s rescue fund as the region’s deficit crisis worsens. European Central Bank Vice President Vitor Constancio said today that Ireland would be able to tap the fund to save its banks, while fellow central bank council member Miguel Angel Fernandez Ordonez said the nation should make a “final decision” on an aid plan.

Swaps on Ireland reached a record high closing price of 599 basis points last week on concern the ballooning cost of rescuing its banking system is becoming unsustainable. Contagion from Ireland also helped push the cost of insuring Portuguese and Spanish debt to records on Nov. 11.

Portugal declined 35 basis points to 401 today and Spain was 15 lower at 246. Italy fell 8.5 to 180, CMA prices show.

‘Thin Markets’

“Thin markets and poor liquidity we can accept at this time of the year,” Mann said. “But the huge speculation surrounding Ireland could not have come at a more inopportune time.”

Swaps on Greece declined 7 basis points to 857, reversing an earlier increase after European Union authorities revised the nation’s budget deficit to 15.4 percent of gross domestic product from 13.6 percent, making it the euro region’s largest shortfall.

The cost of insuring corporate bonds also fell after retail sales in the U.S. climbed by the most in seven months.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings declined 3 basis points to 457, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 1.75 basis points to 101.5.

The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers dropped 4.5 to 134 and the subordinated index was 9.5 lower at 210.5.

A basis point on a credit-default swap contract protecting 10 million euros ($13.6 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. An increase signals deterioration in perceptions of credit quality.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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