Business Irish

Monday 11 December 2017

Ireland leads surge in sovereign default swaps on bailout costs

The Government's cost to bail out Anglo Irish Bank could exceed Standard & Poor’s previous estimate for €35bn. Photo: Bloomberg News
The Government's cost to bail out Anglo Irish Bank could exceed Standard & Poor’s previous estimate for €35bn. Photo: Bloomberg News

The cost of insuring against default on European government debt surged, led by Ireland, amid concern the bill for bailing out the region’s banking system is growing.

Credit-default swaps tied to Irish bonds jumped as much as 30.5 basis points to a record 519 after more than doubling in the past two months, and were at 501 basis points as of 11:15am in London, according to data provider CMA.

The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 3.5 basis points to 163.5.

Standard & Poor’s said the total cost of bailing out nationalised lender Anglo Irish Bank could exceed €35bn, stoking speculation the Government will be forced to choose between fully repaying senior bondholders and tackling the budget deficit.

Irish two-year government notes slumped today, sending yields to the highest level since Bloomberg began collating the data in 2003.

“It’s a key test for the market,” said Greg Venizelos, a credit strategist at BNP Paribas in London. “The cost of the Anglo Irish bailout is too high for Ireland to afford without jeopardising its fiscal position.”

Credit-default swaps on Portugal increased 12.5 basis points to 442.5, close to May 6’s record-high closing price of 461, while Greece climbed 20 basis points to 833 and Italy was up 4.5 basis points at 201, CMA prices show.

The yield on Ireland’s two-year government note rose as much as 46 basis points to 4.70pc, Bloomberg generic data show.

Financial swaps

Sovereign debt concerns drove an increase in the cost of insuring financial-company bonds, with the Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rising 2 basis points to 148 and an index of their riskier subordinated debt climbing 1 basis point to 218, according to JPMorgan.

Default swaps insuring Anglo’s senior bonds rose 24.5 basis points to 960.5, a record based on closing prices, according to CMA.

The level implies a 57pc probability the lender will default on its debt within five years.

Gauges of corporate risk also rose. The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated European companies climbed 10.3 basis points to 526.2, according to Markit Group Ltd.

The final bill for the Anglo bailout, which has already cost €22.9bn, is expected to be announced this week as the Government seeks to stem concern it will require funds from the European Union.

Moody’s Investors Service lowered its rating yesterday on the senior unguaranteed securities of the bank.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements, and an increase signals a deterioration in investor perceptions of credit quality.

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


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