Credit-default swaps surge to record


The cost of insuring against default on Greek, Irish and Portuguese government debt surged to records, driving a gauge of sovereign bond risk to an all-time high, on concern Europe's deficit crisis is worsening.

Credit-default swaps on Greece soared 49 basis points to 1,819, Ireland rose 35 to 801 and Portugal climbed 20 to 817, according to CMA prices in London.

Meanwhile, Irish short-term bonds fell today, with the three-year bond yield above 14 per cent and two-year yields edging higher above 12.3 per cent. The benchmark 10-year bond yield was lower at 11.544 per cent.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 14 basis points to 239.5. An increase signals deteriorating perceptions of credit quality.

Investors are betting Greece will default if it's unable to pass the austerity measures needed to qualify for the next instalment of international aid. Greek prime minister George Papandreou is set to shuffle his Cabinet and seek to win a confidence vote today as protests over budget cuts fuel speculation the measures will be put in jeopardy.

"A failure to reach a political agreement in Greece risks the next tranche of funds, due to be paid at the end of this month, to be withheld," said Gary Jenkins, co-head of fixed income at Evolution Securities in London. "If unresolved then this could potentially result in a default by the middle of July."

Investor confidence was also hurt by comments from Minister for Finance Michael Noonan that senior bondholders should share in the losses of Anglo Irish Bank and Irish Nationwide Building Society, reversing a policy of protecting owners of senior securities.

Swaps on Spain climbed 16 basis points to 303, the highest since January, Italy rose 12 to 187 and Belgium was nine higher at 163.

The cost of insuring European corporate debt also rose. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings increased 2 basis points to 113.75 basis points, the highest since Jan. 10, according to JPMorgan Chase and Co.

The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings rose six basis points to 419. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell two basis points to 178 and the subordinated index climbed two to 310.

A basis point on a credit-default swap protecting €10 million of debt from default for five years is equivalent to €1,000 a year. 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.