Business Irish

Wednesday 25 April 2018

Irish default swaps surge to record levels

Credit-default swaps on Ireland and its banks surged to record high levels on concern the cost of bailing out the nation’s financial system is unsustainable.

Contracts on Ireland soared 28 basis points from a record closing level to 606, according to data provider CMA.

Swaps on the senior debt of Allied Irish Banks climbed 43.5 basis points to 899.5 and Bank of Ireland increased 37.5 to 724.5.

The Government is struggling to convince investors it can plug its budget deficit and repay debt as the cost of backstopping its banks mounts.

The euro weakened as the nation’s troubles undermined confidence in the region and the yield on the Irish 10-year bond gained eight basis points to 7.91pc.

“The uncertainty regarding sovereign debt and deficits in the European periphery will remain a strain for risky assets,” Tim Brunne, a Munich-based strategist at UniCredit, wrote in a note to investors.

The extra yield, or spread, investors demand to hold Irish 10-year bonds instead of similar-maturity benchmark German debt increased 10 basis points to 531 basis points, near the record 534 basis points reached at the end of last week.

Swaps on AIB subordinated debt jumped 8 percentage points to 54pc upfront and 5pc a year, meaning it costs €5.4m in advance and €500,000 annually to insure €10m of the bank’s debt for five years. Subordinated swaps on Bank of Ireland jumped 2 percentage points to 31pc upfront and 5pc a year.

Government swaps

Ireland led an increase in the cost of insuring government debt, CMA prices show. The Markit iTraxx SovX Western Europe Index of swaps on 15 nations rose 3.75 basis points from a record closing level to 174.75.

Contracts on Portugal jumped 9 basis points to 454, Spain climbed 9.5 to 259.5 and Italy increased 4 to 195. Greece declined 3 basis points to 195.

The cost of insuring corporate bonds also rose. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed 7 basis points to 438, according to JPMorgan.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 2 basis points to 98.75, JPMorgan prices show. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers was unchanged at 132.5.

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. An increase signals deterioration in perceptions of credit quality.


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