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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Cost of Insuring European Sovereign Debt Rises - Markit

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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Peripheral Euro-Zone Sovereign Debt Insurance Costs Rise

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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