By Abigail Moses - Aug 27, 2010 8:51 PM GMT+0800
Confidence in the ability of European governments to resolve the region’s budget crisis is waning, with a gauge of sovereign debt risk heading for the biggest monthly increase since it was created a year ago.
The Markit iTraxx SovX Western Europe Index of credit- default swaps linked to 15 governments is up 41.75 basis points so far this month at 156.5, according to data provider CMA. Swaps on Italy, Ireland and Spain are set for record one-month increases. Contracts on Portugal are poised for the biggest rise since April and Greece for the most since June.
The region’s so-called peripheral nations face slumping growth as austerity measures introduced to cut budget deficits to European Union limits curb consumer spending and reduce tax take. A slowdown in the U.S. economy is also triggering concern there will be a global double-dip recession.
“Weaker data has really heightened concern about a slowdown in the U.S. economy, which could impact Europe,” said Brian Barry, a credit strategist at Evolution Securities Ltd. in London. “People haven’t been 100 percent convinced yet we’ll be able to come out of this without a sovereign default.”
Markit’s SovX gauge has increased during nine of the 11 months it’s been trading, climbing from 46 basis points at inception, CMA prices show. Contracts on Ireland have surged 130 basis points so far this month to 341, the highest level since March 2009. Swaps on Italy jumped 90 basis points to 228, Spain rose 65 to 250, Portugal is up 116 basis points at 346 and Greece is 174 higher at 920.5.
Corporate Swaps
Swaps on corporate debt in the U.S. and Canada reversed an earlier increase after a government report showed the world’s largest economy grew at a 1.6 percent annual rate in the second quarter, more than the 1.4 percent median forecast of economists in a Bloomberg News survey.
The revised increase in gross domestic product compared with a 2.4 percent estimate issued last month, figures from the Commerce Department showed today in Washington. Corporate profits climbed.
The Markit CDX North America Investment Grade Index fell 1.1 basis points to 113.4 basis points as of 8:45 a.m. in New York, according to Markit Group Ltd. The index earlier increased to 114.75.
The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 52.5 basis points so far this month to 530, and was 6 higher today, according to JPMorgan Chase & Co.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 13 basis points this month to 118, JPMorgan prices show. The Markit iTraxx Financial Index of 25 banks and insurers is up 33 basis points at 148.5.
A basis point on a credit-default swap contract protecting 10 million euros ($12.7 million) 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.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
From Bloomberg published on Aug 27, 2010 8:51 PM GMT+0800