Financial Credit-Default Swaps Fall on European Loan Operation

The cost of insuring against default on financial debt fell to the lowest in two weeks after the European Central Bank said the region’s banks took 489 billion euros ($645 billion) in three-year loans.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers decreased for a third day, falling 11 basis points to 287 and the subordinated index dropped for a fifth day, down 17 to 523, according to JPMorgan Chase & Co. at 2:30 p.m. in London. A decline signals improvement in perceptions of credit quality.

The Frankfurt-based ECB flooded euro-area lenders with almost double the amount of cash forecast by economists as part of its latest attempt to keep credit flowing during the sovereign debt crisis. Policy makers are hoping the ECB’s longer-term refinancing operation will spur demand for government bonds.

“We had a big rally this morning and a big rally yesterday,” said Roger Francis, an analyst at Mizuho International in London. “It’s still a very constructive result.”

Swaps on Barclays Plc tumbled 17.5 basis points to 210, Commerzbank AG dropped 18 to 305 and Deutsche Bank AG fell 12 to 203, all two-week lows, CMA prices show.

The cost of insuring sovereign debt fluctuated, with the Markit iTraxx SovX Western Europe Index linked to 15 governments falling two basis points to 359.5 basis points, after earlier falling further and then increasing.

Italian Swaps

Default swaps on Italy rose eight basis points to 506 and Spain increased 11 to 399, reversing earlier declines, according to CMA. Contracts on Belgium fell two basis points to 313, France decreased four to 216 and Germany was unchanged at 104.

Swaps on the U.K. rose one basis point to 98 after Moody’s Investors Service said the nation’s “strengths” aren’t enough to completely shield its credit rating from the euro-area debt crisis and the government must stick to its deficit-reduction program.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased six basis points to 766.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 4.25 basis points to 175 basis points.

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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