9/28/2010
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Ireland Leads Surge in Sovereign Default Swaps on Bailout Costs CDS Cost Rise. Ireland 5-Year Sovereign CDS Rise To 505/525 basis points. LONDON (Dow Jones)--The cost of insuring Irish sovereign debt against default using credit default swaps rose significantly early Tuesday, before recovering slightly, as concerns about the cost to Ireland of supporting its banking system continue to worry markets.Ireland's five-year sovereign CDS spreads rose to 505/525 basis points mid-morning, before recovering slightly to 495/515 basis points, around 32 basis points higher from Monday's closing level, according to data provider Markit.Ireland's CDS have never closed above 500 basis points.
"Sovereign debt risk concerns will linger in the euro-zone with Ireland firmly in the spotlight," credit strategists at BNP Paribas SA said in a note."With its CDS at its highest, it will continue to weigh on credit markets in the very short-term."An investor said that the wide gap--around 20 basis points--between the bid and offer levels that dealers were quoting suggests that the market was illiquid.Ireland's CDS have risen steadily since early August as fears around the bailout of its crippled banking system have grown.Moody's Investors Service Monday downgraded some of the debt of Anglo Irish Bank Corp., saying it was unclear whether the debt would benefit from government support under plans to split Anglo Irish Bank into two entities.
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 companies or countries.The tone in the broader European sovereign CDS market was weaker Tuesday. All constituents of the Markit iTraxx SovX Western Europen index, which allows investors to buy or sell credit protection on a basket of 15 sovereign borrowers, including Ireland, were wider.
The index itself was up 5.25 basis points at 163/164 basis points. -By Mark Brown, Dow Jones Newswires. Greek debt crisis fuels fears of European sovereign default. The cost of insuring against default on European government debt surged, led by Ireland, amid concern the bill for bailing out the region's banking system is growing.Credit-default swaps tied to Irish bonds jumped as much as 30.5 basis points to a record 519 after more than doubling in the past two months, and were at 501 basis points as of 11:15 a.m. in London, according to data provider CMA.
The Markit iTraxx SovX Western Europe Index of default swaps on 15 governments rose 3.5 basis points to 163.5.Standard & Poor's said the total cost of bailing out nationalized lender Anglo Irish Bank Corp. could exceed 35 billion euros ($47 billion), stoking speculation Ireland's government will be forced to choose between fully repaying senior bondholders and tackling the region's largest budget deficit. Irish two-year government notes slumped today, sending yields to the highest level since Bloomberg began collating the data in 2003.