Germany Riskier Than U.K. for First Time Since January 2008

Germany is riskier than the U.K. for the first time since January 2008, according to prices for credit-default swaps, as the euro-region crisis spreads.

The cost of insuring against a German default rose to 83 basis points in London, which was as much as 2 basis points more than contracts on British debt, according to CMA. The last time German bunds were more expensive to insure than U.K. gilts -- on Jan. 21 2008 -- the difference was less than half a basis point.

“It’s clear that infection is spreading right up the euro credit ladder,” said Bill Blain, a strategist in London at broker Newedge Group. “Suddenly, like a wildfire, it’s leapt into Germany.”

The euro area’s debt crisis is contaminating countries that investors traditionally considered to be havens, even after the European Central Bank resumed buying bonds of peripheral nations. German bunds fell as speculation mounted the region’s largest economy will be forced to pick up the tab for its neighbors, pushing the 10-year yield up from near the lowest since October.

The yield on German 10-year government bonds rose five basis points to 2.35 percent after falling to an eight-month low of 2.23 percent on Aug. 5. Bond yields move inversely to prices.

German Opposition

Credit-default swaps on German debt rose 3.5 basis points to 83, the highest since March 2009, according to CMA. Contracts on U.K. gilts increased 3 basis points to 83 as of 1 p.m. in London, closing the earlier gap.

The ECB started purchasing Italian and Spanish government debt yesterday, overcoming opposition from Germany’s Bundesbank in a move that Royal Bank of Scotland Group Plc (RBS) economists estimate could cost as much as 850 billion euros ($1.2 trillion).

“People are realizing ultimately it’s Germany that’s underwriting all the risk,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “It’s the Bundesbank that’s going to be doing 30 percent of all the buying as part of” the ECB’s Securities Market Program.

Almost two years into the debt crisis that spread from Greece, German policy makers are reluctant to anger voters by aiding euro countries they see as having lived beyond their means. German parliamentary leaders rejected a bid last week to increase the size of the European Financial Stability Facility, the bailout fund set up in 2010 to contain the debt crisis.

Debt Burden

“There is an increasing transfer of risk from the peripheral to the core countries in the euro-zone,” said Saul Doctor, a London-based credit derivatives strategist at JPMorgan Chase & Co. “People are seeing rising risk within the euro area and some countries such as Germany are having to shoulder the burden of the debt crisis.”

Benchmark 10-year gilt yields have slumped 86 basis points this year to 2.65 percent amid bets the U.K. will be insulated from the fiscal crises roiling the U.S. and the euro region. Britain, which like Germany is rated AAA, plans to eliminate its structural budget deficit by 2015 in the biggest fiscal squeeze since World War II.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase signals deteriorating credit quality.

To contact the reporters on this story: Ben Martin in London at bmartin38@bloomberg.net; Charles Mead in London at cmead11@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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