Volkswagen Testing Scandal Spurs Jump in Europe Auto Credit Risk

  • Credit-default swaps on Volkswagen surge to highest since 2009
  • Cost of insuring BMW, Daimler debt climbs more than 30%

The cost of insuring debt issued by European automakers and suppliers surged amid a widening scandal over Volkswagen AG’s cheating on emissions tests.

Credit-default swaps on Volkswagen debt soared 61 percent to the highest in more than six years, based on data from CMA. Swaps on Bayerische Motoren Werke AG and Mercedes-Benz parent Daimler AG jumped more than 30 percent. Those on Fiat Chrysler Automobiles NV and Renault SA both climbed 14 percent.

Volkswagen set aside an initial 6.5 billion euros ($7.2 billion) to cover potential costs after saying about 11 million vehicles worldwide used engine software that’s at the center of a scandal about tricking emissions tests. The Wolfsburg, Germany-based company faces global scrutiny, with regulators from Germany, France, South Korea and Italy vowing to check Volkswagen autos.

"This remains an open-ended liability because there are so many unknown unknowns,” said Chris Bowie, a London-based portfolio manager at Twentyfour Asset Management. “For that reason, I do not think automaker debt is a sensible risk-adjusted trade right now."

Twentyfour Asset Management, which oversees about 5 billion pounds ($7.7 billion), doesn’t hold Volkswagen bonds, Bowie said.

The cost of insuring Volkswagen’s senior debt rose 82 basis points to 216 basis points, according to CMA. Swaps on parts-makers Valeo SA and Continental AG jumped more than 16 percent.

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