Financial Credit Risk Two-Week Low

ECB cash and U.S. growth contribute to optimistic drop in risk.

The cost of insuring against default on financial debt fell to the lowest in two weeks amid optimism the European Central Bank’s cash injection will ease bank stress and after data signaled the U.S. economy is strengthening.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers fell for a fourth day, dropping 10.5 basis points to 280, according to JPMorgan Chase & Co. at 2 p.m. in London. A decline signals improvement in perceptions of credit quality.

The U.S. economy expanded 1.8 percent in the third quarter compared with a year earlier, down from the 2 percent estimated last month though still faster than in much of recession-hit Europe. European Central Bank President Mario Draghi is speaking today after the Frankfurt-based ECB lent the region’s banks 489 billion euros ($639 billion) in three-year loans, almost double the amount forecast by economists.

“What we’ve seen over the last couple of days has been generally positive,” said Brian Barry, an analyst at Evolution Securities Ltd. in London. “The ECB loans put in more liquidity into the system.”

The cost of insuring sovereign debt was little changed after erasing an earlier decline. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments was unchanged at 357 basis points, the lowest in two weeks.

Swaps on individual euro-region countries also pared their earlier rally, with Italy falling five basis points to 487, contracts on Spain down two basis points at 387, France declining 1.5 basis points to 222.5 and Germany two basis points lower at 103, according to CMA prices.

Default swaps on Hungary rose 39 basis points to 610, the highest this month, after the country was downgraded yesterday to junk status by Standard & Poor’s.

The cost of insuring corporate debt also declined, with contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings falling 14.5 basis points to a two-week low of 761. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 3.5 to 174.75.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

 

Bloomberg

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