French, Dutch CDS at 12-Month Lows as ECB Hints Boost Sentiment
06-Aug-2012
By Ben Edwards
The cost of insuring the bonds of France, the Netherlands and Belgium has fallen to its lowest level in around a year on hopes the European Central Bank is ready to step up efforts to tackle the region's debt crisis.
French, Dutch and Belgian credit default swaps--derivatives that function like an insurance contract for debt--have narrowed significantly in the last two weeks after ECB President Mario Draghi hinted the bank is ready to do "whatever it takes" to preserve the euro.
All three countries saw their debt insurance costs surge to record highs last November as fears about the euro-zone debt crisis spilled over from weaker economies in the south to stronger countries in the north, but their spreads have steadily pressed tighter in recent months as the outlook in the region has improved.
With the ECB seemingly willing to take additional measures to drive down government borrowing costs, concerns about the size of the euro-zone's rescue funds--the European Financial Stability Facility and the yet-to-be fully ratified European Stability Mechanism--have started to recede, supporting the further rally in spreads, said Chris Clark, strategist at ICAP.
"If the ECB did intervene, it would probably take care of the short-dated maturities--where you really need some serious cash to move prices--leaving the ESM to support the longer dates where you get more bang for your buck. All this is positive," he said.
Five-year CDS on France have tightened more than 30 basis points since Mr. Draghi first made his comments in late July, trading at 149 basis points, the lowest since August last year, according to data-provider Markit.
Over the same period, CDS on Belgium have moved more than 40 basis points tighter to 163 basis points, the lowest since July 2011. The Netherlands is trading around 20 basis points tighter at 74 basis points, a level not seen since August last year.
Even Spain has seen its default protection costs fall sharply in the wake of Mr. Draghi's comments, with its five-year CDS tightening by more than 100 basis points in the last two weeks to 514 basis points. This time last year, Spain was trading at 349 basis points, Markit data show.
While the immediate pressure on spreads has lifted, they remain at historically elevated levels. Before the sovereign crisis kicked off in earnest in 2010, Belgium was trading at around 50 basis points, with France and the Netherlands both at around 30 basis points. By contrast, Spain was trading just north of 100 basis points.
"This time last year the debt crisis was actually pretty intense so what prices are definitely not suggesting is that we're out of the woods yet," ICAP's Mr. Clark said.
(END) Dow Jones Newswires |
