The cost of insuring Irish sovereign debt surged to a record as credit-default swaps on Allied Irish Banks Plc subordinated debt signaled a 62 percent probability of default within five years.
Contracts insuring 10 million euros ($14 million) of Allied Irish?s junior bonds cost about 3.25 million euros upfront and 500,000 euros annually, according to data provider CMA. That?s up from 400,000 euros a year in April. Swaps on the government?s debt jumped 27 basis points to 545.
Political pressure for bondholders to share the burden of losses is growing. German Finance Minister Wolfgang Schaeuble said today the euro?s stability depends on making investors pay for future debt crises, brushing aside warnings that Europe?s most indebted countries are being hurt by proposals for a permanent-debt crisis mechanism.
?People in the market have a real concern Ireland is going to struggle to fund itself and therefore banks are going to struggle to fund themselves,? said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. ?There?s a cause and effect between banks and sovereigns. When you have these problems at a sovereign level, it?s fairly evident that the next rung down where problems lay is with the banks.?
Investors are turning on Allied Irish after rival Anglo Irish Bank Corp. last month offered investors 20 cents on the euro for its lower Tier 2 securities. Swaps on Allied Irish?s senior debt increased 25.5 basis points to a record 706, CMA prices show.
Capital Targets
Allied Irish is selling assets to meet capital targets set by the country?s financial regulator after racking up losses in the collapse of the country?s real estate bubble. The bank will not be fully nationalized and will ?honor its debt obligations,? Finance Minister Brian Lenihan said in Dublin today.
Ireland problems weighed on Europe?s indebted peripheral nations, with swaps on Portugal climbing 9.5 basis points to 418 and Spain up 3.5 at 228.5. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 3 to a five-week high of 161.
The cost of insuring corporate bonds was little changed, with the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increasing 3 basis points to 451, according to JPMorgan Chase & Co.
The Markit iTraxx Europe index of 125 investment-grade companies was unchanged at 96.75 and the Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 3.5 to 128.5.
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.
Credit-default 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. An increase signals deterioration in perceptions of credit quality.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
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