Sovereign Debt Risk Surges as Slowdown May Deepen Deficit Woes
Aug. 12 (Bloomberg) -- A gauge of government bond risk rose to the highest level in five 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 4 basis points to 140, according to data provider CMA. The gauge is the highest since July 7 and up from a three-month low of 109.5 on Aug. 3.
Swaps on Ireland climbed to a 17-month high on speculation the $32 billion bailout bill for Anglo Irish Bank Corp. will add to the country's fiscal deficit. Greece's economy contracted for a seventh quarter and unemployment claims in the U.S. unexpectedly rose, deepening concern of a so-called double-dip recession.
"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 finalized yet will probably add quite a bit to the Irish national debt."
Ireland's borrowing costs rose at an auction of 1 billion euros ($1.28 billion) of six and eight-month bills today. The country sold 500 million euros of securities due Feb. 14, 2011, at an average yield of 2.458 percent, compared with 1.367 percent at a July 22 auction of similar bills.
Bailout Costs
The cost of the Anglo bailout may trigger a surge in Ireland's budget deficit to 25 percent of GDP this year, before dropping to 10 percent in 2011, analysts at Dublin-based Davy Research wrote in a note today. The European Union limit for members of the euro area is 3 percent.
Default swaps on Ireland climbed 15 basis points to 286, the highest since March 2009, CMA prices show. Contracts on Anglo Irish jumped 17.5 to 551.5, Allied Irish Banks Plc increased 17.5 to 441 and Irish Life & Permanent Group Holdings Plc rose 14.5 to 337.
Germany may also have to absorb the holdings of two so- called bad banks, raising the nation's debt to 90 percent of gross domestic product, Die Zeit reported. Contracts on Germany increased 3 basis points to 47, the highest since June 29.
Swaps on Greece jumped 17.5 basis points to 809.5 as the wage-cuts and tax increases that aim to trim the European Union's second-biggest budget deficit deepened a recession. Contracts on Portugal climbed 8.5 basis points to 277, Italy rose 10 to 182 and Spain was 7 higher at 221.
U.S. Treasuries
The cost of hedging against losses on U.S. Treasuries climbed for the eighth day, with default swaps rising 1 basis point to 49.5, the highest level since February. Initial jobless claims rose by 2,000 to 484,000 in the week ended Aug. 7, the highest since mid February, Labor Department figures showed.
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 16 basis points to 520, according to JPMorgan Chase & Co., the highest in three weeks.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 4.25 basis points to 116.25, and the Markit iTraxx Financial Index of 25 banks and insurers rose 5.5 to 137.5, 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.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
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