Europe's Sovereign Default Insurance Costs Drop
(Updates prices, adds further comments)
By Mark Brown
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--The cost of insuring European sovereign debt against default fell considerably Tuesday as concerns over Greece's debt ease on hopes of a rescue package.
The Markit iTraxx SovX Western Europe index, which lets investors buy or sell default insurance on a basket of 15 developed sovereign borrowers, tightened from 84 basis points at Monday's close to 77.5 basis points Tuesday afternoon.
The SovX index spreads dropped back below the benchmark for default insurance costs for a range of investment-grade European corporate borrowers for the first time since January, when concerns over European government debt started to come to prominence.
The index was driven tighter by moves in peripheral European sovereign CDS. Greece's five-year sovereign CDS spreads tightened from 345 basis points to 320 basis points by 1630 GMT, according to CMA DataVision, a data provider.
That means the annual cost of insuring EUR10 million of Greek government debt against default for five years has fallen EUR25,000, to EUR320,000.
Greece has been in focus as it tries to convince financial markets that it can cut its budget deficit from 12.7% of gross domestic product last year, over four times the E.U. limit.
The Greek government is expected to outline Wednesday a new austerity package of around EUR4 billion in an effort to cut its huge budget deficit by four percentage points this year, government officials said Tuesday.
This would be followed by a 10-year bond issue by Greece, to raise EUR3 billion-EUR5 billion and help address any near-term liquidity concerns.
And recent reports of a potential bailout have speculated that state-owned financial institutions, like Germany's KfW, could buy Greek government debt.
"There seems to be a consensus that [weaker sovereign borrowers] will not be allowed to come to harm," a trader said. "The next round of Greek austerity measures looks like it could clear the way for [details on] how they will be supported."
Portugal's sovereign CDS also tightened, to 135 basis points from 155 basis points Monday, according to CMA DataVision, while the cost of insuring Spanish sovereign debt dropped to 111 basis points from 121 basis points.
In fact, CDS written on 14 of the SovX Western Europe's 15 constituents tightened Tuesday.
"Today was dominated by the collapse of sovereign CDS levels," said Suki Mann, credit strategist at Societe Generale in London. "We saw SovX long [protection positions] being cut aggressively."
He also said that the threat of greater regulation might be discouraging speculative investors from shorting European sovereign credit by buying protection in the CDS market.
Improving sentiment was also reflected in the cash markets, where the spreads between some southern European sovereigns and German bunds tightened.
The 10-year Greek bond-bund spread was 306.5 basis points shortly before 1800 GMT, compared with 320 basis points Monday afternoon.
For Portugal, the 10-year spread to bunds dropped to 119 basis points, from 126 basis points, and Italy's 10-year bund spreads tightened a touch, to 85 basis points, from 85.5 basis points.
CDS are derivatives that function like a default insurance contract for debt.
Buyers may be protecting investments or making bets against companies or countries.
-By Mark Brown and Clare Connaghan, Dow Jones Newswires; + 44 (0)207 842 9485, mark.brown@dowjones.com |
