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Euro-zone Peripheral Sovereign CDS Weigh On Core
LONDON -- The cost of insuring sovereign debt issued by France and Germany using credit default swaps rose Tuesday, as worries about the euro-zone periphery dragged on its stronger core borrowers.
French five-year sovereign credit default swaps were nine basis points wider at 167 basis points, while German five-year CDS were three basis points wider at 85 basis points, according to Markit.
CDS function like default insurance for debt. Sellers pay buyers if a borrower defaults. A one-basis-point widening in five-year CDS spreads equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years.
CDS written on peripheral euro-zone sovereigns have been widening on worries that demands by Finland for collateral in exchange for taking part in a second Greek bailout and the long process of making changes to the euro zone's bailout fund are increasing the risks of a default.
"On the back of that, we've seen the core widening," said one trader.
Michael Gavin, analyst at Barclays Capital, said in a note Tuesday that "CDS spreads for the larger and more fiscally sound economies' had "responded negatively" to the European Central Bank's move to buy Italian and Spanish bonds this month, "as one would expect if markets viewed the ECB announcement as a move toward a fiscal union in which fiscally stronger governments would make more of their balance sheets available to support stressed governments."
LONDON -- The cost of insuring sovereign debt issued by France and Germany using credit default swaps rose Tuesday, as worries about the euro-zone periphery dragged on its stronger core borrowers.
French five-year sovereign credit default swaps were nine basis points wider at 167 basis points, while German five-year CDS were three basis points wider at 85 basis points, according to Markit.
CDS function like default insurance for debt. Sellers pay buyers if a borrower defaults. A one-basis-point widening in five-year CDS spreads equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years.
CDS written on peripheral euro-zone sovereigns have been widening on worries that demands by Finland for collateral in exchange for taking part in a second Greek bailout and the long process of making changes to the euro zone's bailout fund are increasing the risks of a default.
"On the back of that, we've seen the core widening," said one trader.
Michael Gavin, analyst at Barclays Capital, said in a note Tuesday that "CDS spreads for the larger and more fiscally sound economies' had "responded negatively" to the European Central Bank's move to buy Italian and Spanish bonds this month, "as one would expect if markets viewed the ECB announcement as a move toward a fiscal union in which fiscally stronger governments would make more of their balance sheets available to support stressed governments."
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