Italy, Spain Lead Increase in European Sovereign Credit Risk

Italy and Spain led an increase in the cost of insuring bonds sold by Europe’s peripheral nations as divisions emerged over how best to limit contagion from the region’s budget deficit crisis.

Credit-default swaps on Italy rose 8.5 basis points to 217.5 while Spain increased 20 basis points to 317, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 8.25 basis points to 185.

European Union officials are at odds over whether to increase the 750 billion-euro ($1 trillion) bailout fund as they meet in Brussels today. Divisions appeared last week when a plan to buy government bonds only won support from an “overwhelming majority” of member states and an extension of liquidity measures was endorsed by “consensus,” according to European Central Bank President Jean-Claude Trichet.

“Both underscore the political controversy in Europe regarding these measures,” Maureen Schuller, a credit strategist at ING Groep NV in Amsterdam, wrote in a note to investors. “This, in our opinion, will remain the single most important source of credit market volatility.”

Swaps on Ireland were 12.5 basis points higher at 555 and Portugal was up 15.5 to 443.5, according to CMA.

Portuguese Protection

MetLife Inc., the largest U.S. life insurer, said it bought $200 million of swaps to protect against declines in Portugal’s sovereign debt. The company entered the contracts in connection with the acquisition of American Life Insurance Co., Chief Investment Officer Steven Kandarian said at a presentation in New York, where the company is based.

Sovereign concerns undermined investor perceptions of financial creditworthiness, with subordinated contracts on Portuguese and Spanish lenders heading an increase in bank bond risk, according to CMA.

Swaps on the junior debt of Banco Comercial Portugues SA rose 5 percentage points to 31 percent upfront and 5 percent a year, meaning it costs 3.1 million euros in advance and 500,000 euros annually to insure 10 million euros of bonds for five years. Banco Espirito Santo SA rose 4 percentage points to 31 percent upfront.

Swaps on the subordinated debt of Banco Santander SA increased 31 basis points to 375 and Banco Bilbao Vizcaya Argentaria SA rose 31 basis points to 394.

Financial Index

The Markit iTraxx Financial Index of swaps on the subordinated debt of 25 banks and insurers surged 19 basis points to 299 and the senior index increased 9 basis points to 156, according to JPMorgan Chase & Co. prices.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 3 basis points to 469. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.25 basis point to 107.75, JPMorgan prices show.

A basis point on a credit-default swap contract protecting 10 million euros ($13.3 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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