Spain Credit-Default Swaps Surge to Record on Bank Bailout Woes

The cost of insuring against default on Spanish sovereign bonds rose to a record as the nation’s debt crisis deepened amid concern over bank bailouts.

Credit-default swaps linked to the nation’s debt climbed 23 basis points to 583 at 11:44 a.m. in London, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose seven basis points to 320.5. An increase signals worsening perceptions of credit quality.

Bank of Spain Governor Miguel Angel Fernandez Ordonez resigned a month early, handing over the task of convincing investors that Spanish banks won’t need an international rescue. Bankia group, the nation’s third-biggest lender which received 4.5 billion euros ($5.6 billion) of public funds in 2010, asked for another 19 billion euros on May 25.

“The pressure remains on Spain,” Elisabeth Afseth, an analyst at Investec Bank Plc in London, wrote in a note. “The focus remains on how the government is going to deal with the banking crisis.”

The cost of insuring bank debt also increased with the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rising eight basis points to 299 and the subordinated index jumping 12.5 to 497.5.

Swaps on Banco Santander SA, the biggest Spanish lender, jumped 15.5 basis points to 421 while contracts on Banco Bilbao Vizcaya Argentaria SA added 15 to 461.

Italian Swaps

Italy’s bond yields surged to a four-month high as the nation missed its maximum target for sales of five- and 10-year securities, stoking concern that Europe’s financial woes are crimping investor appetite for the debt. Swaps on the nation’s debt jumped 20 basis points to 542, the highest since Dec. 16.

The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increased 16 basis points to 716. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings advanced five basis points to 175.5 basis points.

A basis point on a credit-default swap protecting 10 million euros of debt from default 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.

To contact the reporter on this story: Michael Shanahan in London at mshanahan3@bloomberg.net

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

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