Wednesday, July 13, 2011

Noncore European Sovereign CDS Hit Fresh Records

By Art Patnaude

Default insurance costs for Italy, Portugal, Ireland and Greece have all hit record highs Monday, as worries the region’s debt crisis could spread to larger economies such as Italy were in focus ahead of the euro-zone leaders’ meeting in Brussels.

Around 0815 GMT, the five-year credit default swap spread on Italy was 0.3 percentage point wider at 2.79 percentage points, while Spain was 0.24 percentage point wider at 3.38 percentage points, according to data-provider Markit. The spread between the asking price and the bid price for these CDS levels has moved further apart, suggesting liquidity is impaired, another sign of stress.

Concern about the crisis moved from its primary focus on Greece last week when Moody’s Investors Service Inc. downgraded its rating on Portugal to junk status. “We think it will take some time to restore confidence in markets, especially as the Greece saga is still unresolved,” said Mizuho credit strategist Anke Richter in a note.

The CDS spreads of all three countries to have received international bailouts were also at new records. Portugal’s five-year spread was 0.77 percentage point wider at 10.90 percentage point, Ireland was 0.68 percentage point wider at 9.70 percentage points, and Greece was 1.10 percentage points wider at 23 percentage points.

“Despite Friday’s approval by the IMF of its latest €3.2 billion of funds for Greece, discussions on a second support program for Greece have got bogged down, not least with limited progress in discussions with private sector creditors on their contribution, while the ECB has remained vocal against any solution resulting in a ‘selective default’,” noted credit strategists at Daiwa Capital Markets.

The individual moves came as the iTraxx SovX Western Europe hit a fresh record at 2.47 percentage points, 17.5 percentage points wider than Friday’s record closing level, according to data-provider Markit. CDS are derivatives that function like a default insurance contract for debt. A rise of one basis point in the cost of five-year CDS equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years. Belgium, which also has a high level of sovereign debt but is not typically included in discussions about the euro zone’s debt crisis, was 0.12 percentage point wider at 1.84/1.9 percentage points, according to a trader.

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