Greece led an increase in the cost of insuring European sovereign debt after Fitch Ratings warned it may cut the nation’s credit rating to junk.
Credit-default swaps on Greece jumped 16.5 basis points to a four-week high of 986, according to data provider CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 2.5 basis points to 202.5, surpassing the Nov. 30 record close.
Greek debt may be downgraded to junk within six weeks after a review of its “fiscal sustainability,” Fitch said yesterday. Public transport workers in Athens are striking for a fourth day this month to protest wage cuts planned in exchange for the nation’s 110 billion-euro ($144 billion) bailout.
The Fitch review will focus on measures to lower the nation’s budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the firm said in a statement. Greece already has non-investment grade rankings at Moody’s Investors Service and Standard & Poor’s.
Swaps on Portugal climbed 9 basis points to 492, the highest level this month, after Moody’s said yesterday it may also face a downgrade.
Contracts on Ireland increased 6 basis points to 595, Italy rose 4 to 225 and Spain was 4.5 higher at 345, CMA prices show.
The cost of insuring against corporate bonds was little changed, with the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings holding at 440.5 basis points and the Markit iTraxx Europe Index of 125 investment- grade companies at 105, according to JPMorgan Chase & Co.
A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
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