Sunday 23 July 2017

European bank risk rises to 5-month high

German Chancellor Angela Merkel wants investors to foot more of the bill in future bank bailouts. Photo: Bloomberg News
German Chancellor Angela Merkel wants investors to foot more of the bill in future bank bailouts. Photo: Bloomberg News

The cost of insuring bonds sold by European banks rose for a sixth day on concern other governments will follow Ireland in forcing investors to share the cost of bailouts.

The Markit iTraxx Financial Index of credit-default swaps on subordinated debt of 25 European banks and insurers rose 4 basis points to a five-month high of 272 as of 3:30pm in London, according to JPMorgan.

Concern about the cost of financial-industry rescues also helped push a gauge of government debt risk to a record.

German Chancellor Angela Merkel wants investors to foot more of the bill in future bank bailouts and this week proposed that buyers of new euro-region debt accept liability clauses starting in 2011, two years before a revamped crisis-management system kicks in.

Nationalised Anglo Irish Bank said it will wipe out investors who refused to accept an 80pc discount on some of its subordinated bonds.

Banks are “becoming a risky investment as sovereigns are struggling with their own refinancing costs, and Ireland is the best example of that,” said Tim Brunne, a Munich-based strategist at UniCredit. “The first line of defense would be to let sub investors participate in the losses.”

Markit Group Ltd’s index of subordinated financial swaps is up from 225.5 on November 19, setting it on pace for the biggest weekly increase since March 2009, JPMorgan data show. The senior index rose 1.5 basis points to 159 today, up from 135.5 at the end of last week.

SovX to record

The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose 3 basis points to a record 184, according to CMA.

Spain increased 8 basis points to an all-time high based on closing prices of 303 and Ireland jumped 11.5 basis points to 591, after earlier reaching a record.

Ireland has also pledged to impose losses on junior bondholders at Irish Nationwide Building Society.

The Government took over Anglo Irish Bank in January 2009 as loan losses spiralled after a property bubble burst, and is preparing to take a majority stake in rivals Bank of Ireland and Allied Irish Banks.

Credit-default swaps on Portugal rose 6 basis points to 487, matching the highest ever on closing prices, CMA prices show. Italy was 4 basis points higher at 205.

The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 3 basis points to 484, JPMorgan prices show. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 1.25 basis points to 107.75.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements.

A basis point on a contract protecting €10m of debt from default for five years is equivalent to €1,000 a year.

Bloomberg

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