“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”
It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA. Greek bonds plunged, sending the 10- year yield to 25 percent for the first time.
German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing his country’s budget gap widened 22 percent in the first eight months of the year.
The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value if the nation fails to meet its obligations. CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated credit- swaps market, lowered its recovery assumption to 38 percent late yesterday, which would give Greece a 95 percent chance of default.
Economy to Shrink
Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.
Greece’s 10-year bond yield rose 111 basis points, or 1.11 percentage points, to 24.65 percent as of 1:55 p.m. in London, after earlier climbing to a euro-era record of 25 percent. The two-year note yield increased 662 basis points to 76.17 percent, after rising to an all-time high.
Greek stocks fell, with the ASE Index tumbling as much as 1.2 percent to the lowest since 1995 and down more than a third from July 22.
The risk of contagion beyond Greece weakened the euro and boosted benchmark German bunds. The common currency fell toward its weakest level since 2001 against its Japanese counterpart, declining 0.6 percent to 104.99 yen.
An index measuring the cost of default protection on 15 European governments to a record. European bank debt risk also jumped to the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.
The Markit iTraxx SovX Western Europe Index of credit- default swaps climbed one basis points to 354, an all-time high based on closing prices. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers increased two basis points to 316, while a gauge of subordinated debt risk was up seven basis points at 557, according to JPMorgan Chase & Co.
“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note yesterday. “This trio are already under intense pressure, but it will get much worse.”
Credit-default swaps on Portugal, Italy and France rose to records, according to CMA. Portugal jumped nine basis points to 1,224, Italy rose four basis points to 510 and France was up 7.5 basis points at 196.5.
Germany’s government is debating how to support its nation’s banks should Greece fail to meet the budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Merkel said in an interview with Berlin-based Inforadio that avoiding an “uncontrolled insolvency” was her “top priority” and that the region’s most indebted country is taking the right steps to getting its next bailout payment.
Credit-default swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all- time highs on bets they’ll have their ratings cut by Moody’s Investors Service this week.
Swaps on SocGen were 14 basis points higher at 448.5, Credit Agricole increased 9.5 to 331.5 and BNP Paribas rose 16 basis points to 321, according to CMA.
Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Downgrades are likely as the review period concludes, said people with knowledge of the matter, who declined to be identified because the information is confidential.
A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. An increase signals declining perceptions of credit quality.
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.