Caixa Geral Swaps Surge as Barclays Warns of Capital Shortfall

The cost of insuring against default on the subordinated debt of Caixa Geral de Depositos SA surged as Barclays Plc analysts said some Portuguese banks could fall short of capital requirements in the next 18 months.

Credit-default swaps on Lisbon-based Caixa’s junior debt jumped 93 basis points to a 10-month high of 681, according to data provider CMA. Barclays recommended buying the contracts because they are the least expensive among the nation’s banks and trade at a low ratio compared to those on its senior debt, which rose 42 basis points today to a nine-month high of 496.

Lenders face a 4.6 billion-euro ($6.1 billion) shortage of the capital required by the Bank of Portugal as bad loans erode capital buffers, Barclays analysts led by Jonathan Glionna wrote in a note to investors. That could grow to 12.4 billion euros if the economy deteriorates more than expected.

“Principal losses could be imposed on the subordinated debt of these banks to return them to adequate capital positions and these actions could trigger CDS contracts,” the analysts wrote. “Shorting the banks via CDS is the best way to position for upcoming developments in the Portuguese banking sector.”

Default 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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