Greece's Default Swaps Show Threat of Imminent Default Easing: Euro Credit
By Abigail Moses and Maria Petrakis - Oct 22, 2010 1:01 AM GMT+0200 Thu Oct 21 23:01:00 GMT 2010
Oct. 15 (Bloomberg) -- Uwe Parpart, chief strategist at Cantor Fitzgerald Hong Kong Capital Markets, talks about the European debt crisis. Christina Romer, former chairman of President Barack Obama’s Council of Economic Advisers, said budget woes in Greece, Ireland, Portugal and Spain are "something to worry about" as the U.S. economy continues its climb out of recession. Parpart, who also discusses the outlook for the euro and U.S. dollar, speaks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)
For the first time since January, insuring against Greece defaulting within a year is cheaper than buying cover for longer, a sign of declining risk in the nation that sparked Europe’s sovereign debt crisis.
Credit-default swaps protecting Greek government bonds for a year cost 565 basis points, 61 basis points less than 10-year protection, according to CMA in London. Before the nation was rescued with a 110 billion-euro ($154 billion) international loan package in May, investors concerned Greece would renege on its debt commitments were willing to pay 665 basis points more for one-year swaps than for 10-year insurance.
The shift suggests that Prime Minister
George Papandreou’s spending cuts and austerity measures are buying the country time to reduce a budget deficit that’s more than four times the European Union’s limit. Greece’s debt is still the world’s second-riskiest behind Venezuela’s, with a 44 percent probability of default within five years, CMA prices show.
“The momentum toward Greece has gone much, much more positive in the last few weeks,” said Anke Richter, a credit strategist at London-based brokerage Conduit Capital Markets Ltd. “They’ve shown the market they’re bringing their house in order and they’re making good progress.”
Greek government bonds were Europe’s best performers in the third quarter, returning 4.8 percent, the most since the three months ending June 2009, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show.
‘On Track’
Moody’s Investors Service said Oct. 5 that Greece’s drive to overhaul public finances had “impressed” the New York-based firm, which signaled that it may now raise the nation’s rating, having cut it to junk in June. The country is “very much on track” to return to international bond markets in the next 12 to 18 months,
Ajai Chopra, acting director of the International Monetary Fund’s European Department, said Oct. 20.
Longer-term debt insurance is typically more expensive than shorter-term protection, and an inversion of the credit-default swap curve signals investors are speculating there’s an imminent risk of default.
Europe’s sovereign debt crisis erupted at the end of 2009 after Greece’s newly elected socialist government said the budget deficit was twice as big as the previous administration had disclosed. The EU and IMF approved the aid package on May 2 in exchange for Papandreou agreeing to cut public-sector wages and pensions and raise taxes on fuel, alcohol and cigarettes.
Still Inverted
The Greek credit-default swap curve remains inverted beyond one year, with two-year swaps costing more than any other maturity, according to CMA. Prices for all contracts remain elevated. One-year insurance started the year at 143 basis points, before rising to 1,300 basis points at the peak of the crisis in June.
“Markets have improved but sovereign concerns are still there,” said
Giada Giani, an economist at Citigroup Inc. in London, the largest U.S. bank.
Eurostat, the EU’s statistics office, will provide revised Greek budget deficit figures for 2006 to 2009 by mid-November. The shortfall is currently put at 13.6 percent of gross domestic product, and the revision may push Greece back above Ireland as the country with the largest 2009 gap, setting a new record since the start of the euro. EU members are supposed to have deficits no higher than 3 percent of the size of their economy.
Highest Yield
Yields on
10-year Greek bonds remain the highest in the euro region, at 9.38 percent as of yesterday. That compares with 6.47 percent for Ireland, 5.89 percent for Portugal, 4.11 percent for Spain and 3.84 percent for Italy.
Credit-default swap curves for Spanish, Portuguese and Irish debt also inverted this year. Swap prices show that, after Greece, Ireland is the second-riskiest European nation with a 30 percent chance of default in five years, ahead of Portugal at 26 percent, according to CMA.
Credit-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. A basis point on a contract insuring $10 million of debt is equivalent to $1,000 a year.
IMF Managing Director
Dominique Strauss-Kahn said Oct. 10 in a Bloomberg HT television interview that Greece is taking the right steps to reduce spending and will extend terms of its loans if euro-region nations agree. Chinese Premier
Wen Jiabao said on Oct. 2 that China’s committed “very positively” to adding to its holdings of Greek bonds.
“Sentiment has turned round a little regarding Greece,” said Rob Dekker, who helps manage $32 billion of European government debt at F&C Asset Management Plc in Amsterdam. “More people looking at it from a fundamental point of view.”
(Bloomberg)
