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BL: Greek Debt `Twilight Zone' Spurs Increase in Sovereign Credit-Default Risk

By Abigail Moses

Feb. 18 (Bloomberg) -- Credit-default swaps on sovereign debt rose on investor concern that Greece may be unable to borrow unless it gets a pledge of financial support from the European Union.

Greece needs to raise 53 billion euros ($72 billion) this year and faces about 16 billion euros of bond redemptions by May as it struggles to narrow a budget deficit that’s more than four times the EU limit. A political ally of German Chancellor Angela Merkel said yesterday that “not a single euro” should go to help Greece.

“It feels a bit like we are in the Twilight Zone,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “We are left with a stand-off that probably has to be resolved before Greece next comes to the market.”

Credit-default swaps on Greek government debt climbed 10.5 basis points to 361.5, according to CMA DataVision prices at 10 a.m. in London. Contracts on Portugal increased 6 basis points to 180 and Spain rose 2 to 134, CMA prices show.

The yield on Greek two-year notes has remained above 5 percent, the highest in the euro zone, even after officials urged the nation this week to reduce its deficit. The premium investors demand to hold the notes instead of benchmark German securities has held above 4 percentage points, the most since the Mediterranean nation joined the euro and more than 10 times its 35 basis point average the past decade.

Greek Bond Sale

Greece is likely to sell 10-year bonds by March, Spyros Papanicolaou, the head of the country’s debt agency, said Feb. 2. The yield on the nation’s outstanding 10-year note increased 12 basis points to 6.5 percent as of 9:51 a.m. in London, after climbing to 6.55 percent, the most since Feb. 9. The 6 percent security due July 2019 fell 0.83, or 8.30 euros per 1,000 euro face amount, to 96.49.

European governments are selling record amounts of debt to haul their economies out of recession. Rising budget deficits, unemployment levels and bad loans in countries from the U.K. to Spain are weighing on sovereign debt markets.

Britain posted its first budget deficit for January since records began in 1993 and jobless claims rose last month to the highest since 1997. Credit-default swaps on the U.K. rose 1.5 basis points to 92.5, CMA prices show.

Bad Loans

Portugal’s unemployment rate rose to 10.1 percent, the highest in 23 years in the fourth quarter after the country’s economy contracted by an estimated 2.7 percent last year. Bad loans at Spanish banks climbed to 5.08 percent of total credit in December.

Spain’s sale of 5 billion euros of 15-year bonds yesterday may have “soothed” some investor concerns, according to Puneet Sharma, head of European credit strategy at Barclays Capital in London. “With a significant amount of issuance expected in 2010, the calm market reaction to this deal could encourage further transactions to come to market,” Sharma wrote in a note to investors.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality.

The cost of insuring against default on European corporate bonds was little changed today, with the Markit iTraxx Europe Index of 125 companies with investment-grade ratings falling 0.75 basis point to 88.75, according to JPMorgan Chase & Co.

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

To contact the reporter on this story: Abigail Moses in London at [e-mail]

Last Updated: February 18, 2010 06:18 EST