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Ireland, Greece Debt Woes Reverse Sovereign Default Swaps Rally

George Papaconstantinou, Greece's finance minister
George Papaconstantinou, Greece's finance minister said the nation had "serious tax compliance issues". Photographer: Hannelore Foerster/Bloomberg

A bondholder showdown in Ireland, slumping Greek tax revenue and political gridlock in Portugal reversed Europe’s biggest sovereign debt rally in three months.

The average price of credit-default swaps on Portugal, Italy, Ireland, Greece and Spain rose to 406.5 basis points from 363.5 last week, according to CMA. That’s the biggest weekly increase since Aug. 13.

Governments of Europe’s so-called peripheral nations are struggling to lower their budget deficits even as they impose public spending cuts and increase taxes. A review of Greece’s 2009 budget showed the deficit was above 15 percent of gross domestic product, more than previously estimated, and the nation has “serious tax compliance issues,” Finance Minister George Papaconstantinou said this week.

“They need to get out of a deficit spiral,” said Tim Brunne, a Munich-based strategist at UniCredit SpA. “It becomes increasingly difficult if you have high debt, and that feeds back again into your deficit and that’s a very difficult spiral to get out of.”

Credit-default swaps on Greece jumped to 794 basis points today from 671.5 last week, CMA prices show. The contracts 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. An increase signals deterioration in perceptions of credit quality.

No Negotiations

Swaps on Ireland soared to 474 basis points today from 428 Oct. 22 as the government became locked in a standoff with Anglo Irish Bank Corp. noteholders over who should bear the cost of rescuing the nationalized lender. Alan Dukes, the chairman of the bank, said he wouldn’t negotiate with creditors who pledged to block a proposed debt exchange that will impose almost $2 billion of losses.

Portugal climbed to 378 basis points from 343 last week after the government and the country’s main opposition party broke off talks on the biggest budget cuts since at least the 1970s, possibly jeopardizing passage of the 2011 plan to tame the euro-region’s fourth-biggest deficit.

Contracts on Spain increased to 215 basis points from 204 last week, while Italy was unchanged at 171, CMA prices show.

“Sovereign issues are likely to be with us for most of the next decade until we see a combination of further unparalleled interventions, big currency moves, inflation, restructurings and/or defaults,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We are not close to any of these at the moment but over time we’ll likely see these themes re-emerge. History would have to be re-written if we don’t.”

Corporate Credit

Swaps on Europe’s peripheral nations also drove a broader gauge of sovereign risk higher, reversing a month-long rally. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose to 151 basis points today from 142.5 Oct. 22.

The cost of insuring against losses on European corporate and bank bonds was little changed this week and benchmark indexes are heading for the biggest monthly declines since July.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell to 97.5 basis points today from 99 last week, according to JPMorgan Chase & Co. The gauge is down from 110.75 basis points Sept. 30.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell to 458 basis points from 459 basis points Oct. 22, JPMorgan prices show. The index cost 510 basis points last month.

The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose to 124.5 basis points from 123.

A basis point on a credit-default swap contract protecting 10 million euros ($13.9 million) of debt from default for five years is equivalent to 1,000 euros a year.

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