A record rally in European credit markets ground to a halt as the unraveling rescue plan for Greece fueled concern of a default triggering turmoil in the euro region.
The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers rose for a seventh day, soaring nine basis points to a one-month high of 252 basis points, according to JPMorgan Chase & Co. at 10 a.m. in London. The measure dropped 58 basis points in January, a record monthly decline.
Europe’s creditor countries are embroiled in a game of brinkmanship with Greek policy makers ahead of a March 20 bond redemption when the country has to make a 14.5 billion-euro ($19 billion) payment. Lender nations are concerned Greece has neither the will nor the ability to put its finances on a sound footing should it receive a 130 billion-euro aid package.
“The perceived impact of a Greek default means that every day that passes without an agreement is likely to make investors more nervous,” said Ian Robinson, a fund manager at F&C Asset Management Plc in London, which oversees about $157 billion.
The Markit iTraxx Financial Index linked to junior debt of 25 banks and insurers jumped 13.5 basis points to 423.5 basis points today, after falling by a record 130 basis points last month.
Credit-default swaps on UBS AG and Credit Suisse Group AG rose to the highest levels in two months after Moody’s Investors Service said it may cut the lenders’ credit ratings by as many as three levels. Contracts on UBS soared 18 basis points to 199 and Credit Suisse climbed 14 to 174, according to CMA.
Goldman Sachs Group Inc., Deutsche Bank AG, JPMorgan Chase & Co. and Citigroup Inc. are among companies that may be downgraded by two levels, Moody’s said in a statement, adding that the “guidance is indicative only.”
The cost of insuring sovereign and corporate debt also surged. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose for a seventh day, the longest streak since November 2010. The gauge climbed 10 basis points to 355, after falling for the past two months. An increase signals deterioration in perceptions of credit quality.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose for a third day, climbing 15.5 basis points to 647.5. The measure has increased for eight of the past nine trading days. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3.25 basis points to 148.75. Both measures fell in December and January.
“It’s been like a merry-go-round with increasing talk of a Greek exit from the euro sitting alongside talk that the bailout might even be delayed until after the April Greek elections,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Meanwhile the mid-March deadline for Greece’s next debt repayment continues to loom closer.”
Government bonds in the euro region’s so-called periphery are also suffering. The yield premium that investors demand to hold 10-year Italian notes instead of benchmark German bunds increased 15 basis points to 402, after dropping to a five-month low of 347 basis points on Feb. 9.
The spread versus bunds on France’s 10-year note rose 18 basis points to 116, while Spanish spreads increased 13 basis points to 371, the highest in more than a month. The extra yield versus German notes on Greece’s bonds widened to 3,144 basis points, close to a record.
Global stock markets are proving more resilient. The Euro Stoxx 600 Index fell 0.7 percent to 262.3, remaining near the seven-month high of 264.6 on Feb. 3.
“Equity markets are confident that a Greek default is not going to rock the world economy and have a meaningful impact on consumer and corporate spending,” said Georg Grodzki, London-based head of credit research at Legal & General Plc, which manages $550 billion of assets. “There is no reason to lose confidence in corporate earnings given there is sufficient growth momentum elsewhere in the world.”
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.