Tags: French | Bond | Risk | Record

French Bond Risk Rises to Record as Crisis Spreads Beyond Italy

Thursday, 10 Nov 2011 12:51 PM

 

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The cost of insuring against default on French government debt rose to a record on concern Europe’s leaders are failing to contain the region’s deficit crisis.

Credit-default swaps on France rose eight basis points to 204, according to CMA prices at 12 p.m. in London, surpassing the record closing price of 202 set Sept. 22. The Markit iTraxx SovX Western Europe Index increased for a fifth day, climbing four basis points to a five-week high of 345.

The European Union predicted that the French economy will grow more slowly next year than President Nicolas Sarkozy projects and called for “close vigilance” on the nation’s budget deficit. European Central Bank Governing Council member Klaas Knot said the bank, which was said to purchase Italian and Spanish bonds today after a rout of the securities yesterday, can’t do “much more” to stem the debt crisis.

“France is starting to become more like a credit than a government bond,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “As Italy goes, so will the rest of the EU. It totally depends on Italy.”

Swaps on Italy fell eight basis points to 563 and Spain declined 11 to 420, after earlier rising to records, CMA prices show. Italy sold one-year bills at an average yield of 6.087 percent today after 10-year note yields surged past the 7 percent level at which Greece, Ireland and Portugal sought international bailouts.

Record Spreads

The additional yield investors receive for holding 10-year French, Spanish, Austrian and Belgian bonds instead of benchmark German bunds rose to euro-era records earlier.

The European Commission predicts that France’s debt burden will climb to almost 92 percent of GDP in 2013, including the support it’s giving to other European countries and to its banks. France extended a short-selling ban on 10 financial stocks for three months as Credit Agricole SA, France’s third- largest bank, said third-quarter profit slid 65 percent on provisions for Greek sovereign debt.

The cost of insuring corporate debt also rose, according to JPMorgan Chase & Co. An increase signals deteriorating perceptions of credit quality.

Contracts on the Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-yield credit ratings increased 4 basis points to 755.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.25 basis points to 183.5 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 7.5 basis points to 282.5 and the subordinated index was 13 higher at 518.

A basis point on a credit-default swap protecting 10 million euros ($13.6 million) 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.


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