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Credit Risk Rises in Europe as Focus Stays on U.S. Budget Talks

Credit risk rose in Europe as U.S. lawmakers arranged to meet as they seek to avoid more than $600 billion in spending cuts and tax gains that will start in January.

The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies increased 13.5 basis points to 478 basis points at 1:43 p.m. in London. The gauge tumbled 275 basis points since the end of 2011 and is headed for the best year since 2009.

President Barack Obama meets congressional leaders today to discuss the country’s budget plans before a year-end deadline. Lawmakers gave little sign they intend to act together, disputing which party would be responsible for missing the deadline.

“Markets are not holding their breath,” Ishaq Siddiqi, a London-based market strategist at ETX Capital, said in a note to clients. There are “ongoing concerns that the U.S. economy is now firmly on course to go over the fiscal cliff,” he wrote.

The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies increased three basis points to 117. The gauge tightened 56 basis points this year, the first decline in three years.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of banks and insurers rose three basis points to 142. The gauge fell 18.5 basis points this month and 136.5 this year, the biggest decline since 2005 when data first started being collected.

A basis point on a credit-default swap contract protecting 10 million euros ($13.2 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: Hannah Benjamin in London at hbenjamin1@bloomberg.net

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

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