Saturday 25 November 2017

Portugal risk rises after Irish rescue

The cost of insuring against losses on Portuguese government bonds climbed for a third day as traders look past the bailout of Ireland to which country will be next to require assistance.

Credit-default swaps tied to Portuguese debt rose 12 basis points to a one-week high of 430 basis points, according to UBS AG. The contracts, which reached a record 478 basis points on November 11, have widened about 100 basis points in the past month.

Irish swaps fell after the Government applied for a bailout to help fund itself and save its banks, following Greece in seeking a rescue from the European Union and the International Monetary Fund.

Investors are now asking themselves “who’s next? Italy, Spain or Portugal,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note.

“There is just too much skepticism about the prospects for the euro,” he wrote. “Too many of the rough edges and inconsistencies that lie at the heart of the European single currency have been exposed.”

Credit-default swaps on Ireland fell 28.5 basis points to 478.5 basis points, the lowest level since October 29, while contracts on Greece fell 11 basis points to 957 basis points, CMA prices show.

The Government will channel some of the money from the EU and IMF to lenders through a “contingent” capital fund, Finance Minister Brian Lenihan told reporters yesterday. The rest of the package, which Goldman Sachs estimates may total €95bn, will help Ireland avoid selling bonds.

Corporate swaps

Swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 8.75 basis points to 448, according to Markit Group Ltd. The index is a benchmark for the cost of protecting bonds against default and a decline signals improvement in perceptions of credit quality.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 2 basis points to 99, Markit prices show.

A basis point on a credit-default swap contract 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.


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