Portugal, Spain Credit-Default Swaps Soar to Records Amid Bailout Concerns

The cost of insuring against default on Portuguese and Spanish government debt soared to record-high levels as an aid package for Ireland failed to reassure investors the region’s debt crisis will be contained.

Credit-default swaps on Portugal jumped 37 basis points to 539, and contracts on Spain climbed 28.75 to 351.5, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 9 basis points to 197, a record based on closing prices.

European stocks fell, extending losses into a fourth week, and bonds dropped as Ireland’s 85 billion-euro ($113 billion) bailout brought focus on the prospect of more aid to indebted nations. The region’s economy may weaken next year as budget cuts to stem the crisis hurt consumer demand and faltering global expansion curbs exports, the European Commission said.

“The market seems to think it’s inevitable Portugal requests assistance next -- perhaps in January? -- and then after that Spain will be scrutinized with a fine tooth comb over the coming months,” said Jim Reid, head of fundamental strategy at Deutsche Bank AG in London.

Swaps on Italy rose 28 basis points to 244, the highest level in almost six months, as the nation’s borrowing costs increased at a sale of 6.8 billion euros of bonds.

The cost of insuring the subordinated bonds of European banks also rose as investors bet Ireland’s precedent for making junior bondholders share the cost of a rescue will be followed. Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose “big haircuts” on junior bondholders after the bailout.

Financial Swaps

The Markit iTraxx Financial Index of swaps on the junior debt of 25 European banks and insurers soared 16.5 basis points to 294.5, after earlier rising to the highest level since April 2009, according to JPMorgan Chase & Co. The senior index was up 1 at 165, after earlier falling as much as 9 basis points.

Swaps on the senior debt of Ireland’s banks fell after the government repeated its pledge those bondholders won’t lose money. Contracts insuring 10 million euros of Allied Irish Banks Plc debt for five years dropped 6.75 percentage points to 18 percent, or 1.8 million euros, in advance and 5 percent annually.

Swaps on Ireland increased 5.5 basis points to 604 and Greece, which was bailed out earlier this year, dropped 10 basis points to 962, CMA 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. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

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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