Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show
The cost of insuring against default on European sovereign bonds rose on concern the 130 billion-euro ($173 billion) bailout for Greece will fail to resolve the region’s debt crisis.
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments increased eight basis points to 342 basis points at 11:26 a.m. in London. An increase signals deterioration in perceptions of credit quality.
The Greek government’s decision to introduce legislation for so-called collective action clauses, allowing it to enforce losses on bondholders, makes it more likely that default swaps on the nation’s debt will be triggered. An International Swaps & Derivatives Association official said in an interview that the group is monitoring the situation “diligently.”
“Given the vulnerable state of the Greek economy, the failure to implement earlier reforms and patience running thin amongst its European partners there will be plenty of further crises,” according to Elisabeth Afseth, a fixed-income analyst at Investec Capital Markets in London.
As much as $3.2 billion of default insurance tied to Greek debt may be trigged if the CACs are used because all investors would be bound by a majority agreement to accept a proposed debt restructuring. Policy makers previously rejected the possibility of a credit event that would trigger swaps, arguing it would encourage traders to bet against indebted nations and worsen the crisis.
The introduction of the clauses doesn’t in itself trigger default swaps, though using them does, according to ISDA rules.
The cost of insuring against losses on corporate debt also rose, with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbing 7.5 basis points to 575.5, according to JPMorgan Chase & Co.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2.25 basis points to 133.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased nine basis points to 222 and the subordinated gauge was 10 higher at 372.5.
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.