By Mark Brown
LONDON–The cost of insuring the debt of peripheral euro-zone sovereigns rose in early trading Tuesday, as tensions in Korea saw investors around the world move out of riskier assets.
Ireland’s five-year sovereign credit default swaps saw the biggest move, rising 0.25 percentage points to 5.5/5.7, according to one trader. Irish Prime Minister Brian Cowen said Monday he intends to dissolve parliament in the new year after the country’s budget process is completed.
Portuguese and Greek credit default swaps rose 0.1 percentage point to 4.6/4.8 and 9.9/10.2, respectively. Spain’s credit default swaps were five percentage points higher at 2.86/2.92.
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 0.1 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.
The premium investors demand to hold peripheral sovereign debt over German bunds also increased as bunds and other safe-haven government bonds rose on the news that North Korea had shelled South Korea.
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