Greek Default Insurance Costs Race Higher Amid Debt Fears

By Art Patnaude

Reuters

The outlook remains dark.

Rising concerns about Greece’s debt problems drove the cost of insuring European sovereign debt against default to record highs Monday, as many European markets closed in recognition of Whit Sunday/Pentecost.

The Greek five-year credit default swap spread continued to rise to fresh highs, according to data-provider Markit. “Volumes are very low and there’s not a lot of liquidity in the market–hence the size and speed of the moves,” said one trader.

Ahead of the U.S. open, the Greek five-year CDS spread was at 1612 basis points, 70 basis points wider than Friday’s close. CDS are derivatives that function like a default insurance contract for debt. A rise of one basis point in the cost of five-year CDS equates to a $1,000 increase in the annual cost of protecting $10 million of debt for five years.

The debate over Greece’s rescue has carried over from last week, when German Finance Minister Wolfgang Schaeuble called for “substantial” participation in a Greek debt restructuring by private sector creditors, while European Central Bank President Jean-Claude Trichet reiterated the institution’s opposition to any form of restructuring.

With no consensus in sight, the growing discord has unsettled market participants. The CDS spreads for other heavily indebted euro-zone economies were under pressure as well, although they had tightened slightly from earlier Monday.

“People are worried about the lack of resolution (to the Greek crisis),” the trader said, specifically noting protection buying on the SovX Western Europe index, Spain and Italy, where liquidity was more substantial.

The five-year CDS spread on Spain was seven basis points wider at 283 basis points, from 289 earlier. Italy was three basis points wider at 178 basis points.

The SovX Western Europe index was six basis points wider at 215 basis points, near its widest level of 222 basis points reached Jan. 10. The index dropped to 157 basis points in early April before starting its steady climb on renewed concerns about Greece.

Elsewhere, the five-year CDS spread on Portugal was 30 basis points wider at 763 basis points, while Ireland was 24 basis points wider at 736 basis points.

“Macro risk rules and keeps many investors on the sidelines, short of any clear conviction and rather reducing risk,” said Anke Richter, credit strategist at Mizuho. “Unfortunately, we cannot see this investor apathy changing unless some positive momentum either on U.S. growth or Greece comes along.”