Japan Debt Risk Falls as Euro Bank Optimism Spurs Global Rally

The cost of insuring against a Japanese sovereign default tumbled from a near record high as optimism Europe’s policy makers will propose measures to support banks sparked a global credit rally.

Credit-default swaps insuring Japan’s government bonds fell 16 basis points to 138 at 12 p.m. in London, after reaching a record-high 155 basis points on Oct. 4, according to CMA. The price of the contracts is still double that at the beginning of the year.

The European Commission proposes “coordinated action to recapitalize banks” and rid them of toxic assets, President Jose Barroso said today. The sovereign debt crisis has spawned as much as 300 billion euros ($401 billion) of credit risk for European banks, the International Monetary Fund said in a September report.

“The euro zone’s optimism and the capital injection news that has come out today have impacted on the Japanese CDS spread,” said Mana Nakazora, the chief credit analyst at BNP Paribas Securities Japan Ltd. in Tokyo.

Optimism European leaders are getting to grips with a crisis that has already forced Greece, Ireland and Portugal to seek international bailouts also helped prompt a rally in default swaps insuring European bank debt.

The Markit iTraxx Financial Index of swaps linked to senior debt of 25 European lenders and insurers fell for a second day, declining 17.5 basis points to 252, according to JPMorgan Chase & Co. A drop signals an improvement in investors’ perceptions of a borrower’s credit quality.

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 euros of debt for five years is equivalent to 1,000 euros a year.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.