Sovereign Debt Risk Surges to Record on Greek Default Concern
The cost of insuring European sovereign debt rose to a record on concern Greece will default if its government fails to pass an austerity plan this week, triggering a banking crisis across the region.
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 3 basis points to a record 246 at 11:30 a.m. in London. Swaps on Greece climbed 28 basis points to 2,143, signaling an 84 percent probability of default within five years, according to CMA.
Prime Minister George Papandreou needs to unite his lawmakers in two votes on a 78 billion-euro package ($110.8 billion) of budget cuts and asset sales before Greece can tap a fifth loan payment from last year’s 110 billion-euro rescue. The European Central Bank has warned a Greek collapse would cripple the nation’s lenders and hurt banks across the region that are already under pressure to bolster capital.
“If Greece will end in an uncontrolled debt restructuring, the risk of a run on Greek banks and of that spilling over to other banking systems is quite high,” said Philip Gisdakis, a strategist at UniCredit SpA in Munich. “Although most people still say their base case expectation is that it will go through, people are concerned about what’s going to happen if this vote is going to fail.”
Contracts on Ireland jumped as much as 27 basis points to a record 832 and Portugal increased 21.5 to an all-time high of 859.5, while Spain and Italy rose to the highest levels since January. An increase signals deteriorating perceptions of credit quality.
Market Discomfort
The Markit iTraxx Financial Index linked to senior debt of 25 European banks and insurers increased 4 basis points to 180 and the subordinated index climbed 5.5 to 310.5, the highest since Jan. 12, according to JPMorgan Chase & Co.
“Now it appears that international financial stability rests on a few Greek politicians and people are not so comfortable with that,” Gisdakis said.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose as much as 2 basis points to 116.75 basis points, the highest since Nov. 30, and was trading at 115.75 basis points, according to JPMorgan.
Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 9 basis points to 437, the highest since Jan. 11.
A basis point on a credit-default swap protecting 10 million euros ($14.2 million) of debt from default for five years is equivalent to 1,000 euros a year. 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
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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