Clearinghouses Raise Italy Debt Trade Costs as Rating Cut Looms

LCH Clearnet SA, Europe’s biggest clearinghouse, and Cassa di Compensazione e Garanzia SpA raised the amounts charged to trade Italian government as Standard & Poor’s prepares to cut the nation’s credit rating.

The margin needed for bonds due in 3.25 years to 4.75 years will increase to 6.60 percent, LCH Clearnet said today in a statement. The margin was also raised for bonds maturing from 4.75 years through 30 years and for inflation-linked debt. Italy’s Cassa di Compensazione also changed the margin, or deposit, it charges clients to trade Italian government bonds.

S&P cut Italy BBB+ from A, said a European Union official who declined to be identified because the decision is not yet public. S&P declined to comment. France was also stripped of its top credit rating as banks suspended talks with Greece over debt restructuring, the first blows this year to efforts aimed at stemming Europe’s fiscal turmoil.

“The event risk of a downgrade to Italian bonds could cause more selling, and this would spark greater price volatility going forward, which is why margins were raised” said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York. “A downgrade may exclude Italian bonds from some portfolios, which raises the risks for clearinghouses.”

The so-called deposit factor for Italian bonds due in seven-to-10 years will be 8.30 percent from Jan. 17, Borsa Italiana’s CC&G said in a document on its website today. That compares with 8.15 percent announced on Dec. 7.

Default Protection

The cost of insuring euro-zone government bonds against default rose to a record on Nov. 25 on concern a member of the single currency would default.

Italian government bonds have lost 5.662 percent last year, according to Bank of America Merrill Lynch indexes, worse than the 6.04 percent return in the so-called Group of Seven countries.

Clearinghouses guarantee investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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