>>EDZ +7.20%/EEM-2.58%: Greece, Spain Lead Rise in Sovereign Debt Risk Near Record High
By Kate Haywood
June 29 (Bloomberg) -- Greece and Spain led a surge in the cost of insuring against losses on sovereign debt to near a record as protests over austerity measures and concern banks may struggle to fund themselves triggered a credit-market sell-off.
The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 5.5 basis points to 164, the highest level in three weeks and approaching the all-time high of 168.5 on June 4, according to CMA DataVision. Corporate risk gauges climbed the most in more than a month.
Greek workers downed tools for the fifth time this year to protest against pension cuts and looser labor laws. Swaps on Spanish banks jumped after the Financial Times reported they are asking the European Central Bank to ease the effects of the end of a $540 billion funding program, which terminates this week.
“Markets remain very fragile and easy to spook,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in London.
“It just doesn’t take much to scare the market.”
Credit-default swaps tied to Greek debt jumped 13 basis points to 1,101, having closed at an all-time high of 1,125 on June 4, according to CMA. Spanish contracts rose 9 to a record 275 basis points.
Contracts on Banco Santander SA, Spain’s biggest bank, gained 15 basis points at 215 and Banco Bilbao Vizcaya Argentaria SA jumped 17 basis points to 278, according to CMA.
Refinancing Operation
Banks must repay 442 billion euros ($540 billion) July 1 that they borrowed from the ECB a year ago under the so-called Long-Term Refinancing Operation. Lenders in Spain, Ireland, Greece, Italy and Portugal have about 151 billion euros of central bank loans coming due this week, according to Barclays Capital estimates.
Corporate bond risk also rose after the Conference Board revised its leading economic index for China to show the smallest gain in five months in April. Stocks and U.S. index futures plunged, Treasury two-year note yields dropped to a record low and the yen strengthened on concern that growth in the main engine of the world’s economic recovery is slowing.
Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 31 basis points to 577, according to JPMorgan Chase & Co., the highest since May 25.
A basis point on a credit-default swap contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
Credit-default swaps 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.
--Editors: Michael Shanahan, Andrew Reierson
To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.net;
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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