Irish default swaps surge to record on bank funding concerns
Published 08/09/2010 | 13:03
The cost of insuring against losses on Irish sovereign debt surged to a record on concern the Government will struggle to support the nation’s banks.
Investors are losing confidence in the ability of governments to absorb mounting costs from bank bailouts.
The Government is today discussing the future of nationalised Anglo Irish Bank, which last week said it needs about €25bn in state funding.
“The problems of Irish banks are seen as the problems of Ireland,” said Zoso Davies, a credit strategist at Barclays Capital in London.
“The market is focused on debt coming due at Irish banks and the impact this could have on the Irish government.”
Credit-default swaps on Ireland surged 21 basis points to a 402.5, surpassing a previous closing high of 396 in February 2009, according to data provider CMA.
Bank of Ireland and Allied Irish Banks, the country’s two biggest lenders, have €16.7bn of debt maturing this year, according to data compiled by Bloomberg.
Banks in Europe’s most indebted nations need to refinance $122bn of bonds this year.
Credit-default swaps on Anglo soared 58.5 basis points to 774.5, the highest level since March 2009.
Contracts on Allied Irish Bank jumped 29.5 basis points to 521.5 and Bank of Ireland increased 21 basis points to 409, CMA prices show.
The Government has told the European Commission it’s considering a number of options for Anglo including winding it down, retaining it in its current form and splitting it into “good” and “bad” parts.
Finance Minister Brian Lenihan said yesterday the Government will extend parts of its banking guarantee to help lenders tap international money markets.
The spread between Irish 10-year bonds and the equivalent German bunds, Europe’s benchmark, has widened about 60 basis points since Standard & Poor’s downgraded the nation’s debt last month.
It was a record 379 basis points today, according to Bloomberg generic data.
Concerns about the Irish banking system helped drive indexes of credit-default swaps on European government and bank debt higher.
The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments climbed 2 basis points to 155, CMA prices show.
The Markit iTraxx Financial Index of swaps on the senior debt of 25 European banks and insurers jumped 7.5 basis points to 147, according to JPMorgan Chase & Co.
Markit’s sovereign benchmark, where Europe’s peripheral countries are more heavily represented, now exceeds the financial gauge by the most ever.
Swaps on Greece jumped 21.5 basis points to 916, Portugal climbed 11.5 basis points to 341.5, Italy increased 8 to 221 and Spain rose 8.5 to 244.5, CMA prices show.
The cost of insuring against default on European corporate bonds also increased as a decline in German exports added to concern the region’s economic recovery is slowing.
The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 6 basis points to 506.5, and the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 3 basis points to 113, according to JPMorgan.
A basis point on a credit-default swap contract protecting €10m 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.