The cost of insuring against default on European bank debt surged to the highest in three months on concern deadlock in Italy’s elections will trigger a flight from risky assets as a political vacuum roils markets.
The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers climbed 12 basis points to 163, at 11:30 a.m. in London, the highest since Nov. 28 and headed for the biggest monthly increase since May. Contracts insuring Italy’s bonds rose 43 basis points to a 2 1/2-month high of 293, the biggest jump since December 2011.
Italy’s inconclusive election re-ignited jitters over Europe’s sovereign crisis, sparking concern a rejection of austerity measures will spill into other heavily indebted countries. Italy faces months of political turbulence which may see President Giorgio Napolitano install an interim government to write a new election law as the prelude to another vote.
“Gridlock in parliament means gridlock in the economy,” Alberto Gallo, the head of European macro credit research at Royal Bank of Scotland Group Plc in London, wrote in a client note. “The longer the instability lasts, the more the recession can deepen, pushing up unemployment, defaults and bad loans. In the worst-case scenario, the weaker banks could see deposit outflows re-emerge.”
Intesa Sanpaolo SpA (ISP) was the worst performer in the financial default-swaps index, with contracts on Italy’s second- biggest lender jumping as much as 38 basis points to 327, the highest since Nov. 19.
UniCredit SpA (UCG), Italy’s No. 1 bank, was the second biggest climber, rising as much as 34 basis points to 355, the highest since Nov. 20. Swaps tied to Assicurazioni Generali SpA (G), the country’s biggest insurer, rose 25 basis points to 240, the highest since Feb. 7.
Telecom Italia SpA (TIT), the nation’s biggest phone company, may be “disproportionately impacted” by the political deadlock, according to Sam Morton, an analyst at Mizuho International Plc in London. The company put on hold a sale of hybrid securities that it needs to bolster finances until after the election.
Swaps insuring the Milan-based company climbed 33 basis points to 363, the highest in five months, according to prices compiled by Bloomberg. Contracts on Italy’s government bonds pared their increase, rising 41 basis points to 291.5.
Securities issued by Finmeccanica SpA (FNC), the country’s largest aerospace and defense company, and Enel SpA (ENEL) led declines in Bank of America Merrill Lynch’s Euro Non-Financial index. Finmeccanica’s 600 million-euro 5.25 percent bonds due 2022 slumped 1.8 percent to 98 cents on the euro, the lowest since Feb. 12.
Italy’s largest utility’s 1 billion-euro 4.875 percent notes due 2023 dropped 1.7 percent to 102.7 cents on the euro, also the lowest since Feb. 12, Bloomberg data show.
The Markit iTraxx Europe Index of swaps on investment-grade companies rose seven basis points to 120, the highest since Nov. 30. The Markit iTraxx Crossover Index of swaps on 50 companies with mostly speculative-grade ratings climbed as much as 26 basis points to 470, the highest this year before paring the gain to 465 basis points.
Credit-default 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. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.
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