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Corporate, Sovereign Bond Risk Falls as Greek Referendum Fades

Credit-default swaps on corporate and sovereign bonds fell after Greek Prime Minister George Papandreou backed away from a referendum on the terms of the country’s bailout package.

Contracts on the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 20.5 basis points to 700.5, according to JPMorgan Chase & Co. at 4 p.m. in London. The Markit iTraxx SovX Western Europe Index linked to 15 governments fell two to 320. A decline signals improving perceptions of credit quality.

Papandreou reached out to the opposition about forming a transitional government, indicating that agreement would secure international aid and remove the need for a referendum on euro membership. Just hours after saying Greeks need to decide on whether their future is in the euro, Papandreou said the country belongs in the currency bloc.

“The referendum increased the probability of a hard default,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “So at the very least this probability has fallen. But there’s still an information void that needs to be filled.”

Credit-default swaps on Belgium dropped seven basis points to 278, according to CMA. Contracts on France decreased seven to 177, Italy declined 16 to 481 and Spain fell six to 373.

German Swaps

Swaps on Germany declined three basis points to 87, Ireland decreased 27 to 698 and Portugal fell 23 to 1,005, CMA prices show. It costs $6 million in advance and $100,000 annually to insure $10 million of Greek debt for five years.

Sentiment was also boosted after the European Central Bank unexpectedly cut interest rates. ECB officials, meeting under the presidency of Mario Draghi for the first time, lowered the benchmark interest rate by 25 basis points to 1.25 percent, wrong-footing 51 of 55 economists in a Bloomberg News survey.

The move triggered a reversal of swaps, which had earlier surged after European leaders said they’d hold 8 billion euros ($11 billion) of aid until the referendum.

“The ECB seem to have felt the urgent need to support the economy,” Annalisa Piazza, a fixed-income strategist at Newedge Group in London wrote in a note. “However, Draghi cannot take the risk to lose the so-much criticized ECB’s reputation as an independent actor whose first objective is maintaining price stability.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 4.75 basis points to 169.75. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell 12 basis points to 244 and the subordinated gauge was 20 lower at 457.

A basis point on a credit-default swap protecting 10 million euros 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.

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