Irish credit risk jumps to record
The cost to protect Ireland’s debt from default climbed to a record, leading a surge in European sovereign credit-default swaps, on concern Anglo Irish Bank won’t pay back bondholders in full.
Contracts on Ireland jumped 39.5 basis points to 503.5 basis points at 10:49am in London, according to data provider CMA.
Swaps on subordinated debt of Anglo, which was nationalised last year, now cost €5m in advance and €500,000 annually to insure €10m of debt for five years.
Investors are fleeing Irish bonds amid speculation the cost of shoring up the country’s banks will hurt efforts to tame the European Union’s biggest budget deficit.
Government guarantees covering some of the subordinated debt sold by the nation’s banks come to an end next week, while Central Bank Governor Patrick Honohan said in June he didn’t know if junior bondholders in Anglo will be “made whole.”
“Ireland got pummeled as the ongoing concerns about banks, political and austerity came rolling back in,” Bill Blain, joint-head of fixed income at Matrix Corporate Capital LLP in London, said today in a note to clients.
The Government’s original banking guarantee, covering all banks’ liabilities aside from undated subordinated debt, is due to come to an end on September 29.
A second guarantee in January 2010, the so-called Eligible Liabilities Plan, allows banks to issue bonds of up to five years in duration. The ELG is subject to review every six months, and is currently due to expire at the end of December.
Lenders can continue to issue ELG-covered bonds until then and notes will be government-guaranteed until maturity.
The European Commission approved on September 21 an extension of the ELG to include short-term bank liabilities, including corporate deposits and interbank deposits, which were not originally included in the plan.
The ELG does not include any subordinated debt or asset-covered securities.
The Markit iTraxx SovX Western Europe Index of swaps on 15 countries from France to Greece climbed 4.5 basis points to 166, the highest level since June 7, and approaching the record of 168.5 on June 4.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 11 basis points to 531, according to JPMorgan Chase & Co.
The index is a benchmark for the cost of protecting bonds against default and an increase signals a deterioration in the perception of credit quality.
The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 4.5 basis points to 119, JPMorgan prices show.
The cost of hedging against losses on financial bonds also increased with the Markit iTraxx Financial Index of swaps on 25 banks and insurers climbing 8 basis points to 154.
A basis point on a credit-default swap protecting €10m of debt from default for five years is equivalent to €1,000 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.