Sunday, July 10, 2011

Spain’s Sovereign Debt Insurance Costs Rise

By Irene Chapple

LONDON–The cost of insuring Spain’s sovereign debt against default rose in early trading Wednesday after Moody’s Investors Service put the country’s Aa1 ratings on review for possible downgrade.

The move from Moody’s reflects its concerns over the country’s refinancing needs next year and the strain of recapitalizing its debt-strapped banks.

Five-year credit default swaps on the country’s sovereign debt were 0.09 percentage points higher at 3.32 percentage points by 3:08 a.m. EST, according to data provider Markit.

While the Moody’s move was not a great surprise, any such review is “never good news,” an analyst said.

CDS are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers. A rise of? 0.01 percentage point in the cost of five-year CDS equates to a $1,000 rise in the annual cost of protecting $10 million of debt for five years.

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