Tags: European | Bank | Debt | Risk

European Bank Debt Risk Declines Amid Optimism on U.S. Recovery

Friday, 23 Dec 2011 08:36 AM

Credit-default swaps insuring bonds sold by European banks and governments fell amid optimism the U.S. economy is recovering and will help boost global growth.

The Markit iTraxx Financial Index tied to the senior debt of 25 banks and insurers fell for a fifth day, declining two basis points to 274 at 1 p.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx SovX Western Europe Index linked to 15 governments dropped six to 351, the lowest since Dec. 7.

U.S. personal spending, durable-goods orders and new home sales picked up in November, reports are forecast to show, after data yesterday showed a drop in jobless claims. Sovereign credit was also boosted as European Central Bank Executive Board member Lorenzo Bini Smaghi said policy makers shouldn’t shirk from using quantitative easing if deflation becomes a danger to the euro region.

“The market may be reacting positively to the comments from ECB board member Bini Smaghi on the use of QE in the euro zone, however this remains at best a distant prospect,” said Roger Francis, an analyst at Mizuho Securities Co. Ltd. in London.

The SovX index has risen 70 percent this year as European leaders failed to come up with a solution to the crisis that has roiled markets for most of 2012. The gauge has declined 4 percent in December, only the second monthly drop since March.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings rose 1 basis point today to 757, reversing an earlier drop to a two-week low, JPMorgan prices show. The Markit iTraxx Europe Index of swaps linked to 125 companies with investment-grade ratings fell 0.5 basis point to 172 basis points.

A basis point on a credit-default swap protecting 10 million euros ($13.1 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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