Saturday, January 22, 2011

Irish CDS Spread Hits Fresh Record

By Art Patnaude and Irene Chapple

The Irish five-year credit default swap spread widened to another new record Wednesday as political pressures continued to sour sentiment on the country’s debt.

The resignation of Fianna Fail party member Jim McDaid Tuesday lowered the government’s majority in parliament to just three, raisng more doubt whether the budget will be passed by the December deadline.

Credit market investors are closely watching the government’s attempts to put the nation back on a stable financial footing, one trader said. “It’s a massive task, it’s a herculean task, and there are credit investors speculating it is beyond the government’s capabilities,” he said.

The spread on Ireland was 15 basis points wider at 538, after widening 27 basis points Tuesday, according to Markit. This means it now costs an average of $538,000 a year to insure $10 million of debt issued by the company. Cash bonds are also under stress, with the 10-year bond yield at 7.398% from Monday’s low at 7.02%, 495 basis points over the benchmark German bund.

CDS are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against countries.

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