The cost of insuring against a sovereign default in Europe surged as Greece’s political deadlock and Spain’s bank capital crisis heightened speculation the euro region may start to crumble.
The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments jumped 7.5 basis points to 293.5 at 3:15 p.m. in London, signaling deterioration in perceptions of credit quality. Contracts on Spain soared as much as 26 basis points to a record 543, according to Bloomberg data.
European officials are starting to consider a Greek abandonment of the euro as authorities in Athens struggle to form a government that agrees to the austerity terms of the nation’s bailout. Spain’s plan to force banks to increase provisions by 30 billion euros ($39 billion) and inject less than 15 billion euros of cash will worsen its debt burden and may not be enough, Moody’s Investors Service said.
“The risk eventually is some kind of euro exit,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “There’s the rise of austerity rebels in other countries as well, and Spain’s bank recapitalization plan isn’t going to be sufficient to convince people.”
Swaps on Spain were trading at 539, while Italian debt jumped 29 basis points to a four-month high of 487 and Ireland climbed 28 to 621, Bloomberg data show.
The cost of insuring against default on European corporate and financial debt rose to the highest levels since January, according to BNP Paribas SA.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings soared 43 basis points to 728. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 13 to 171.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers jumped 21 basis points to 286.5 and the subordinated index was up 32 at 467.
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.