Ireland led a surge in the cost of protecting European government bonds from default to record highs after its seizure of Anglo Irish Bank Corp. triggered concern over mounting bank bailouts.
Credit-default swaps on Irish debt soared 36 basis points to an all-time high of 257, according to CMA Datavision prices at 9.25am in London. Spain, Austria and Germany also climbed to records, CMA prices show. The cost of default protection on European banks fell.
Investors are speculating that widespread bailouts will drive up the cost of government borrowing around the world as the worst financial crisis since the Great Depression curbs tax revenue.
Credit-default swaps, contracts conceived to protect bondholders against default, 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 decline signals an improvement in the perception of credit quality, a rise indicates a worsening of the perception of credit quality.
"We are seeing a transfer of credit risk from the private sector to the public sector," said Andrea Cicione, a credit strategist at BNP Paribas SA in London. "The fact that governments are getting their hands dirty and getting involved in bailing out banks and the economy in general means the systemic component of risk has been reduced."
Dublin-based Anglo Irish led a decline in the cost of protecting bank bonds, with contracts dropping 100 basis points to 374, the lowest in six weeks, CMA prices show. Contracts on Allied Irish Banks fell 27 to 228.
The benchmark Markit iTraxx Financial index of 25 European banks and insurers dropped 5 basis points to 113, according to JPMorgan Chase & Co prices.
"Increased government support is positive for credit," BNP's Cicione said. "It provides some relief to investors' concern with the banking sector."
A basis point on a credit-default swap contract protecting €10 million of debt from default for five years is equivalent to €1,000 a year.
Bloomberg