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Debt Risk Rises From 17-Month Low in Europe on U.S. Budget Talks

The cost to insure European company debt from default rose from a 17-month low as U.S. budget talks stalled after House Republican leaders scrapped a plan to allow higher taxes.

The Markit iTraxx Europe Index of credit-default swaps on 125 investment grade companies climbed three basis points to 112 at 3:12 p.m. in London, up from the lowest since July 2011, according to data compiled by Bloomberg.

Credit risk rose after House Speaker John Boehner yielded to anti-tax resistance within the Republican party, throwing budget negotiations deeper into turmoil. House members and senators won’t vote on budget issues until after Christmas, giving them less than a week to reach agreement to avert tax increases and spending cuts set to take effect in January.

“It became obvious last night that a compromise between the two parties in order to avoid the U.S. going over the fiscal cliff is becoming increasingly unlikely,” Markus Huber, head of German sales trading at ETX Capital in London, wrote in a note.

The cost of insuring against default on high-yield corporate debt is heading for the first annual decline in three years, with the Markit iTraxx Crossover Index of swaps on 50 mostly junk rated companies, up 15 basis points today at 460, from 755 basis points at the start of the year. The Markit iTraxx Europe Index fell 61.5 basis points this year.

Financial Swaps

Swaps on financial debt are heading for the biggest annual decline since indexes started trading in 2004. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers increased four basis points to 138.5 today, from 279 basis points on Dec. 30, 2011.

The subordinated index rose three basis points to 231 basis points, compared with 512 at the end of last year.

Swaps on Cyprus rose after Standard & Poor’s cut the nation’s long-term debt rating for the third time in five months, citing a rising risk of default as the government’s short-term financing is “increasingly vulnerable.” The grade fell to CCC+ from B.

The upfront cost of credit-default swaps insuring $10 million of Cyprus’s debt for five years rose by $230,000 to $3.45 million, according to data provider CMA.

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: Katie Linsell in London at klinsell@bloomberg.net

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

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