Tuesday 12 December 2017

Sovereign debt risk rises as slowdown may deepen deficit crisis

A gauge of government bond risk rose to the highest level in three weeks on concern Europe’s deficit crisis will worsen as slowing economic growth exacerbates bank bailout costs.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose for a seventh day, climbing 1 basis point to 137, according to data provider CMA. The gauge is the highest since July 20 and up from a three-month low of 109.5 on August 3.

Swaps on Ireland climbed to a two-month high on speculation the bailout bill for Anglo Irish Bank will add to the country’s fiscal deficit. Germany may also have to absorb the holdings of two so-called bad banks, raising the nation’s debt to 90pc of gross domestic product, Die Zeit reported.

“A weakening macro picture leading to increasing budget deficits for sovereigns has led to sovereign spreads widening again,” BNP Paribas SA strategists in London wrote in a note to investors. “The size of ‘Bad Anglo’ while not finalised yet will probably add quite a bit to the Irish national debt.”

Ireland’s borrowing costs rose at an auction of €1bin of six and eight-month bills today. €500m of securities due February 14, 2011, were sold at an average yield of 2.458pc, compared with 1.367pc at a July 22 auction of similar bills.

The cost of the Anglo bailout may trigger a surge in Ireland’s budget deficit to 25pc of GDP this year, before dropping to 10pc in 2011, analysts at Dublin-based Davy Research said today. The European Union limit for members of the euro area is 3pc.

Default swaps on Ireland climbed 4 basis points to 275, CMA prices show. Contracts on Anglo Irish jumped 15 to 549, Allied Irish Banks Plc increased 15 to 439.5 and Irish Life & Permanent Group Holdings Plc rose 14.5 to 337.

Contracts on Germany increased 1 basis point to 45, the highest since June 29. Swaps on Portugal climbed 3.5 basis points to 273, Italy rose 3 to 175, Greece increased 4.5 to 796.5 and Spain was 1.5 higher at 215.5, CMA prices show.

The cost of insuring corporate debt against default also rose with the Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings increasing 10 basis points to 514, according to JPMorgan Chase & Co., the highest in three weeks.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 2 basis points to 114, and the Markit iTraxx Financial Index of 25 banks and insurers rose 1.25 to 133.25, JPMorgan prices show.

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. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.


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