Spain Leads Surge in Sovereign Credit Risk to Record in Europe

Spain led a surge in the cost of insuring European government debt to a record on concern the region’s peripheral nations will struggle to cut budget deficits and repay debt.

Credit-default swaps on Spanish government bonds jumped 10.5 basis points to 275.5, an all-time high based on closing prices, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 2.5 basis points to 179.5.

Investors are shunning Europe’s most indebted nations, driving borrowing costs and swaps higher for an 11th consecutive day. Confidence in Spain is ebbing after its central bank estimated the economy stagnated from July to September after emerging from recession in the first quarter.

“Spain is getting carried along with the general weakness in peripherals,” said Nick Burns, a London-based credit strategist at Deutsche Bank AG.

Credit-default swaps on Portugal increased 6 basis points to 473.5 and Ireland climbed 3 to 602, both records based on closing prices. Italy was up 5 at 204 and Greece was 3 basis points higher at 871, CMA prices show.

Sovereign debt concerns drove swaps on European bank bonds to the highest levels in six weeks. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 1.5 basis points to 141, and the subordinated index increased 2 basis points to 216.5, according to JPMorgan Chase & Co.

‘Sovereign Weakness’

“Sovereign weakness has weighed most heavily on financials, in particular peripheral banks,” Zoso Davies, a credit strategist at Barclays Capital in London, wrote in a note to investors.

Credit-default swaps on the senior debt of Allied Irish Banks Plc rose 17.5 basis points to a record 927 and Bank of Ireland Plc jumped 16.5 basis points to a record 739, CMA prices show.

Contracts on the subordinated debt of Anglo Irish Bank Corp. increased 1.7 percentage points to 77.5 percent upfront and 5 percent a year. That means it costs 7.75 million euros in advance and 500,000 euros annually to insure 10 million euros of the bank’s debt for five years.

The difference in yield, or spread, between 10-year Irish bonds and similar-maturity bunds widened to a record 553 basis points, or 5.53 percentage points. Portuguese 10-year bonds fell, pushing the yield 20 basis points higher to 7.02 percent. That’s the highest on record, according to Bloomberg generic data. The Portuguese-German 10-year yield spread widened 16 basis points to 449 basis points, the most ever.

Funding Costs

“These funding costs that you’re seeing right now are clearly not sustainable for countries that are not going to grow that fast for some years,” Erik Nielsen, chief European economist at Goldman Sachs Group Inc. said yesterday on Bloomberg Television’s “Midday Surveillance” with Tom Keene. “There is a big probability the Irish and the Portuguese will end up having to get help from” policy makers, he said.

The cost of insuring corporate bonds also rose. The Markit iTraxx Europe Index of swaps linked to 125 companies with investment-grade ratings increased 1.25 basis points to 102, the highest level since Oct. 7. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 1 to 445. The index traded at a six-month low on Nov. 5.

A basis point on a credit-default swap contract protecting 10 million euros ($13.8 million) of debt from default for five years is equivalent to 1,000 euros a year.

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. an increase signals deterioration in perceptions of credit quality

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