Greece Leads Drop in Sovereign Debt Risk as IMF May Extend Loan
October 11, 2010, 7:39 AM EDT
By Kate Haywood
Oct. 11 (Bloomberg) -- Credit-default swaps on Greece fell to the lowest level in four months after the International Monetary Fund said it may be willing to extend bailout loans.
Contracts on Greek bonds dropped 36 basis points to 695, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments declined 3 basis points to 143, the lowest in six weeks.
IMF managing director Dominique Strauss-Kahn said the $154 billion of aid to Greece could be extended beyond 2013 as long as European governments that took part in the bailout agree and the nation sticks to budget deficit cuts. Chancellor Angela Merkel’s administration opposes any move to grant Greece more time, the German Finance Ministry said today.
“We are getting all this noise telling us how well Greece is doing,” said Bill Blain, a strategist at Matrix Corporate Capital LLP in London. “But the fact that the IMF is willing to extend the loans sounds like a restructuring of Greek debt and politically the German government has to look tough and make Greece stick to the rules of the bailout.”
Investors demand a yield premium of 729 basis points to lend to Greece for 10 years rather than Germany, the most of any country in the euro zone. That’s compared with 754 basis points on Friday and down from a euro-era record of 973 basis points on May 7.
Greek Statistics
Credit-default swaps of other so-called peripheral euro- zone nations also fell. Portugal dropped 9 basis points to 387, while Spain was 7.5 basis points lower at 209, according to CMA.
Any move to give Greece more time for repayment would be “premature” given that it needs to show a deficit-reduction program can be implemented, said Bertrand Benoit, a spokesman for Germany’s Finance Ministry. Lenders have to ensure there is “no doubt” about the quality of Greek statistics, he said.
The cost of insuring against losses on corporate bonds also fell with the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings declining 8 basis points to 459, according to JPMorgan Chase & Co. in London. The Markit iTraxx Europe index of 125 companies with investment-grade ratings dropped 3 basis points to 98.75.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
A basis point on a contract protecting 10 million euros ($14 million) of debt for five years is equivalent to 1,000 euros a year. An increase signals deterioration in perceptions of credit quality.
