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WSJ: European Default-Risk Index at Fresh High

By MARK BROWN
FEBRUARY 8, 2010, 10:20 P.M. ET

LONDON—A key measure of default risk for developed-nation European sovereigns was set to close at a fresh high Monday, driven by further weakness in Greek, Portuguese, and Spanish credit default swaps.

The move comes as market participants look ahead to Thursday's meeting of European Union heads of state. Many market participants are looking to see if EU nations will declare some kind of direct or indirect financial support for the country, one the most highly indebted in Europe. Concerns over its high annual deficit relative to the size of its economy are spreading to other countries whose economies have been hard hit.

The SovX Western Europe index, which lets investors buy or sell default insurance on a basket of 15 sovereigns, was at 1.125 percentage point late in the European day, according to index owner Markit, compared with Friday's closing level of 1.06 percentage point. The index moved above a full percentage point for the first time on Thursday.

Portugal's sovereign CDS were at 2.42 percentage point, Greece's were at 4.30 percentage point, and Spain's at 1.73 percentage point, Markit data showed. All were wider compared with Friday's closing levels.

That means the annual cost of insuring €10 million ($13.7 million) of Portuguese government debt against default for five years was €242,000, while it was €430,000 for Greek debt and €173,000 for Spanish debt. CDS are derivatives that function like a default insurance contract for debt.

"These three were the main underperformers in the SovX index today," Suki Mann, credit strategist at Société Générale SA, said in a note. "The Greece/Portugal/Spain story has taken on the role of the driving force for sentiment towards risky assets."

The cost of insuring the debt of euro-zone members with large budget deficits has been rising this year, as they come under pressure to cut deficits and on worries about their borrowing costs. CDS moves, which are highly visible and widely watched, can become a barometer of investor worries than itself can generate more anxiety, spilling over to other markets.

Some have noted that the swaps sometimes suggest that countries are headed for a default though yields on bonds issued by those countries don't indicate such a dire outcome.

Write to Mark Brown at [e-mail]
http://online.wsj.com/article/SB10001424052748703630404575052743617779382.html?mod=WSJ-WorldMarkets-LeadStory