Ireland, Greece Deficit Woes Halt Europe's Sovereign Default Swaps Rally
By Abigail Moses - Oct 29, 2010 11:17 AM GMT+0200 Fri Oct 29 09:17:48 GMT 2010
A bondholder showdown in Ireland, slumping Greek tax revenue and political gridlock in Portugal halted Europe’s biggest sovereign debt rally in three months.
The
average price of credit-default swaps on Portugal, Italy, Ireland, Greece and Spain rose to 409.5 basis points from 363.5 on Oct. 22, according to data provider CMA. The swaps are heading for the biggest weekly increase since July 2.
Governments of Europe’s so-called peripheral nations are struggling to lower their budget deficits even as they impose public spending cuts and increase taxes. A review of Greece’s 2009 budget showed the deficit was above 15 percent of gross domestic product, more than previously estimated, and the nation has “serious tax compliance issues,” Finance Minister
George Papaconstantinou said this week.
“The European sovereign debt and deficit problems and the disparity of growth and fiscal balance among EU countries remain one of the important risk factors for credit assets,” Amey Dyckmans, a Munich-based strategist at UniCredit SpA, wrote in a note to investors.
Credit-default swaps on Greece jumped to 796.5 basis points today from 671.5 last week, CMA prices show. The contracts 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. An increase signals deterioration in perceptions of credit quality.
No Negotiations
Swaps on Ireland soared to 482 basis points today from 428 Oct. 22 as the government became locked in a standoff with Anglo Irish Bank Corp. noteholders over who should bear the cost of rescuing the nationalized lender.
Alan Dukes, the chairman of the bank, said he wouldn’t negotiate with creditors who pledged to block a proposed debt exchange that will impose almost $2 billion of losses.
Portugal climbed to 378 basis points from 143 last week after the government and the country’s main opposition party broke off talks on the biggest budget cuts since at least the 1970s, possibly jeopardizing passage of the 2011 plan to tame the euro-region’s fourth-biggest deficit.
Contracts on Spain increased to 216.5 basis points from 204 last week, while Italy climbed to 175 from 171, CMA prices show.
“Sovereign issues are likely to be with us for most of the next decade until we see a combination of further unparalleled interventions, big currency moves, inflation, restructurings and/or defaults,”
Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We are not close to any of these at the moment but over time we’ll likely see these themes re-emerge. History would have to be re- written if we don’t.”
Corporate Credit
Swaps on Europe’s peripheral nations also drove a broader gauge of sovereign risk higher, reversing a month-long rally. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose to 149.5 basis points today from 142.5 Oct. 22.
The cost of insuring against losses on European corporate and bank bonds was little changed this week and benchmark indexes are heading for the biggest monthly declines since July.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose to 99.5 basis points today from 99 last week, according to JPMorgan Chase & Co. The gauge is down from 110.75 basis points Sept. 30.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose to 465 basis points from 459 basis points Oct. 22, JPMorgan prices show. The index cost 510 basis points last month.
The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose to 126 basis points from 123.
A basis point on a credit-default swap contract protecting 10 million euros ($13.9 million) of debt from default for five years is equivalent to 1,000 euros a year.
(Bloomberg)
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Un'occhiata generale.
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Nelle fasi calde divento troppo analitico....
