The cost of insuring against default on European sovereign debt surged the most in almost four months on concern a referendum on Greece’s bailout package may push the country into a disorderly default.
The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments soared 29 basis points to 333 at 1 p.m. in London. An increase signals worsening perceptions of credit quality.
Greek Prime Minister George Papandreou called the referendum and a parliamentary confidence vote after austerity measures he promised in return for aid sparked a wave of social unrest. The move triggered a reversal of the rally sparked by last week’s agreement to boost the region’s rescue fund.
“It is a political gamble which adds further uncertainty to the European debt crisis,” Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, wrote in a note. “It raises the prospect of a disorderly default and an exit from the EU.”
The cost of protecting corporate and financial debt rose by the most in percentage terms since May 2010. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 88.5 basis points to 726 basis points, according to JPMorgan Chase & Co.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 21 at 183 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 35 basis points to 262 and the subordinated gauge was 66 higher at 493.
A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year. 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.