The cost of insuring Spanish and Portuguese subordinated bank bonds soared as traders of credit-default swaps turned their focus to southern Europe following Ireland’s bailout.
Swaps on Portugal’s Banco Espirito Santo SA rose to a record while contracts on Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, climbed to the highest in more than five months. The benchmark gauge of European sovereign risk also jumped to an all-time high, while two indexes tied to bank debt surged the most since June.
Spain and Portugal are falling under the spotlight as traders speculate they will struggle to cut budget deficits and may require aid. Ireland’s rescue “achieves completely the opposite of what it allegedly tries to achieve, namely to calm markets,” Tim Brunne, at UniCredit SpA said in a report.
“Instead, the credit profile of both the sovereign and the impaired financial institutions has been weakened,” the Munich- based strategist wrote. “The disentanglement of the sovereign and the financial sector solvency issue is the pivotal factor to manage the European periphery’s debt problems.”
Swaps on BBVA climbed 57.25 basis points to 397.5 basis points, while contracts on Banco Espirito Santo jumped 77 basis points to 1,091 points, according to data provider CMA.
The cost of insuring Irish debt rose for a third day even as the nation negotiates a rescue package from the European Union and International Monetary Fund, that analysts at Goldman Sachs Group Inc. estimate may total 95 billion euros ($130 billion). Swaps in the government’s bonds climbed 47.5 basis points to 573.25, according to CMA.
That helped drive the Markit iTraxx SovX Western Europe Index of swaps linked to 15 governments 4.5 basis points higher to a record 181.5. Portugal was up 28.5 basis points at 486, Greece 10.75 basis points higher at 1,018.25, Spain up 17.5 at 299.25 and Italy up 6.75 at 198.
“Bailouts are nothing but a short-term string-and-sealing-wax fix,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note. “We into the next stage of the euro sovereign crisis. It’s now a struggle between the political will of the Brussels elites to maintain the euro as is, versus the markets betting they can’t.”
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 ($13.4 million) of debt from default for five years is equivalent to 1,000 euros a year.
Concern that bank debt will be hurt in the fallout of the government debt crisis drove the Markit iTraxx Financial index of swaps linked to subordinated debt up 23 basis points to 260.5, the biggest jump since June 1, according to JPMorgan Chase & Co. The senior index climbed 12.5 basis points to 152.
Swaps on the subordinated debt of Banco Sabadell SA, the largest commercial bank in Spain’s Catalunya region, rose 59.25 to 628.25, while contracts on savings bank Caja Madrid climbed 58.5 basis points to 624.25 basis points, CMA data show. Swaps on junior bonds of UniCredit SpA, Italy’s biggest bank, rose 23.75 basis points to 295.75 basis points, the highest level since June 9.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 18 basis points to 480. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 4 basis point to 107.