Spanish Risk at Record High as Rajoy Struggles to Avoid Bailout
The cost of insuring against a Spanish default jumped to a record as Prime Minister Mariano Rajoy struggles to prevent the nation from becoming the fourth euro-region member to need a bailout.
Credit-default swaps on Spain rose 17 basis points to 498 as of 4 p.m. in London, surpassing the previous all-time high closing price of 493, according to CMA. The contracts are up from 431 at the start of the month and 380 at the end of 2011, signalling a deterioration in investor perceptions of credit quality.
“Spain is viewed as the next most likely to be in need of a financing program,” said Brian Barry, an analyst at Investec Bank Plc in London. “It’s not surprising to see CDS widening.”
Rajoy, in power with his interim administration since December, said yesterday that the country won’t need a bailout and that it’s “not possible to rescue Spain.” His attempts to reassure investors with the deepest austerity measures in at least three decades are falling flat, with government bond yields rising to near the levels that drove Greece, Ireland and Portugal to seek international cash.
Spain will approve a crackdown on tax fraud today as part of its efforts to plug the budget deficit. A report showed that lenders increased their borrowings from the European Central Bank by almost 50 percent in March to the most on record.
The rate on Spain’s 10-year note rose 17 basis points today to 5.99 percent, 21 basis points up from a week ago. Royal Bank of Canada said in a note that rising borrowing costs increased the chances that the country will seek some sort of external aid, such as having a European Union bailout fund buy up its debt.
Sovereign insurance costs also rose elsewhere, with the Markit iTraxx SovX Western Europe Index of default swaps on 15 governments climbing four basis point to 278.5. The gauge was at 265.5 basis points on April 3.
A basis point on a credit-default swap protecting 10 million euros ($13.1 million) of debt 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.
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