Traders Boost German Default Protection on Europe Crisis Woes

Investors are amassing record amounts of insurance on German government debt on concern Europe’s biggest economy will suffer from the region’s worsening crisis.

The net amount of credit-default swaps outstanding on German bonds surged for a fourth week, climbing by $260 million in the period through May 11 to $20.5 billion, according to the Depository Trust & Clearing Corp. That’s up from $16.1 billion last June.

Germany is the largest contributor to Europe’s bailout packages for Greece and a collapse of that nation’s economy and its possible exit from the euro area may weigh heavily on Chancellor Angela Merkel’s administration. Panagiotis Pikrammenos will head a caretaker government in Greece ahead of a new round of elections on June 17, state-run Athens News Agency reported.

“A euro breakup is going to be a burden on Germany as well as on any of the others,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “The alternative is a large scale bailout, which would obviously also add to German liabilities. It’s hard to see a very positive outcome in any case there.”

The cost of insuring German debt is soaring, even as its bond yields fall. Credit-default swaps on Germany jumped 10 basis points this week to a four-month high of 98, signaling worsening perceptions of credit quality. The contracts cost 67 basis points March 19.

Bond Sale

Germany sold 4.107 billion euros ($5.2 billion) of 10-year bonds at a record low average yield of 1.47 percent, according to data today from the Bundesbank. The nation’s 10-year bond yields were four basis points from an all-time low at 1.47 percent.

Swaps on Spain soared as much as seven basis points to a record 553, before falling two basis points to 544. Contracts on Italy climbed eight basis points to 510.25 and swaps on Ireland rose 8.5 basis points to 663, both four-month highs.

“If you get a Greek exit or threat of such, it will be more difficult for Ireland to come back to the market,” Afseth said. “If Greece leaves, a precedent has been set for a country leaving the single currency and the issue of contagion is quite real.”

The cost of insuring European corporate and financial debt also rose today.

The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increased 16 basis points to 751. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings advanced for a seventh day, climbing 6.25 basis points to 180.25. Both are the highest since Jan. 9.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 6.5 basis points to 295.5 and the subordinated index jumped 11 to 486.

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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