By Art Patnaude and Mark Brown
LONDON–The cost of insuring debt issued by European sovereigns rose Wednesday, with credit default swap spreads on Spain, Portugal and Belgium hitting fresh records, according to data-provider Markit.
The iTraxx SovX Western Europe index was also at a new record, 0.04 percentage points wider at 1.85 percentage points.
Spain’s five-year sovereign CDS spread was 0.1 percentage point wider at a record 3.12 percentage points, while the Portuguese spread rose 0.21 percentage points to 5.1 percentage points and Belgium was seven percentage points wider at 1.55 percentage points.
Ireland also continued to widen, with its CDS spread 0.16 percentage points out at 5.95 percentage points after a downgrade overnight from Standard and Poor’s Corp. to A from AA-.
Credit default swaps are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers, who may be protecting investments, or making bearish bets against companies or countries.
A 0.01 percentage-point rise or fall in the cost of five-year CDS equates to a $1,000 rise or fall in the annual cost of protecting $10 million of debt for five years.
“It’s another weak opening,” said one investor. “You don’t tend to get three weaker days in a row, as people will take profits or cover short positions, so the widening should run out of steam some time unless the whole market unravels.”
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