Sovereign, Financial Bond Risk Falls After Bailout Rules Eased

The cost of insuring European sovereign and financial debt fell after leaders of the 17 euro nations agreed to ease repayment rules for emergency loans to Spanish banks and to relax conditions on help for Italy.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments decreased nine basis points to 288 at 11 a.m. in London, the lowest since May 11. The measure is heading for a fourth weekly drop and the biggest monthly fall since March. A decline signals improvement in perceptions of credit quality.

The deal alleviates concern of bank failures and a collapse of the currency union that have fueled a surge in borrowing costs for Spain and Italy. Euro-area chiefs, who have struggled to agree on a strategy to contain the crisis that began in Greece in 2009, said in a statement they’re determined to “break the vicious circle between banks and sovereigns.”

“This is an important development as it potentially breaks the sovereign/banking death spiral that has dogged the crisis,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For today, and possibly a bit longer, this sets us up for an outperformance of financials and peripheral credits, but we would still urge caution.”

Default swaps on Banco Santander SA dropped 40.5 basis points from a record closing price to 434, while Banco Bilbao Vizcaya Argentaria SA fell 41 from an all-time high to 458.5.

Spain, Ireland Tumble

Default swaps on Spain tumbled as much as 46 basis points today to a one-month low of 543. The contracts, currently at 561, are set to match the biggest monthly decline since October. Contracts on Ireland decreased 29 basis points to 582 and are headed for a record monthly drop. Italy fell 26 basis points to 513.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell 19 basis points to 270 and the subordinated index declined 28 to 443. Both measures are heading for a fourth weekly decline, and the biggest monthly drop since January.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell 29 basis points to 671. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased eight basis points to 170 basis points. Both are set for the biggest monthly declines since January.

A basis point on a credit-default swap protecting 10 million euros ($12.6 million) 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: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

Bloomberg reserves the right to edit or 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.