Greek Debt Swap Concern Triggers Rise in Sovereign Default Risk

The cost of insuring against default on European sovereign debt rose to the highest in almost seven weeks on concern the region’s crisis will worsen as Greece struggles to get investors to agree to a bond swap.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments jumped 4.5 basis points to 349.5, the highest since Jan. 18, according to BNP Paribas SA at 10:46 a.m. in London. It now costs $7.6 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 98 percent chance of default in that time, according to CMA.

Investors have until March 8 to agree to so-called private sector involvement aimed at cutting the nation’s debt load by more than 100 billion euros ($132 billion) and avoid default. There’s growing concern not enough bondholders will take part in the swap, causing Greece to use collective action clauses to enforce losses on all investors or collapsing the deal.

“Messy default is a possibility, but I think it’s more likely we see CACs,” said Bill Blain, a strategist at Newedge Group in London. “The worst case scenario is PSI doesn’t hit the level where they can trigger CACs, and they simply default.”

Swaps on Spain overtook Italy for the first time since September after the Madrid government raised its budget-deficit target on March 2. Credit-default swaps on Spain soared 16 basis points today to 391, while Italy rose 12 to 375, according to BNP Paribas. An increase signals deterioration in perceptions of credit quality.

Commitment Doubt

“Where the market was giving Spain high marks for addressing its structural problems, now it’s beginning to doubt their commitment,” Blain said. “People are now beginning to look at Spain’s crisis with a different eye.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 8.5 basis points to 582.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2.25 basis points to 133.25 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 2.5 basis points to 212 and the subordinated index increased five to 354.

A basis point on a credit-default swap protecting 10 million euros ($13.2 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.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE