The cost of insuring Portuguese government debt rose to a record, leading a surge in European sovereign bond risk fuelled by bets that more of the region?s financial systems will need rescuing.
Credit-default swaps on Portugal jumped 31.5 basis points to 507.5, according to data provider CMA. The Markit iTraxx SovX Western Europe Index increased 7 basis points to an all-time high of 187.
Speculation is mounting that Portugal will be forced to accept aid to stop contagion spreading to Spain. Ireland was made to ask for a rescue on Nov. 21, eight days after officials were pressed on an ECB conference call to accept emergency funds. Portugal?s finance minister said the country doesn?t need rescuing because its position isn?t as serious as Ireland?s.
?There was clearly pressure on Ireland to take money and take it early, to limit contagion,? said Zoso Davies, a credit strategist at Barclays Capital in London. ?That didn?t happen as quickly as some people had expected and there may be a feeling that if Portugal does need support, it should take it sooner, rather than later.?
Ireland is racing to complete its rescue deal amid an outflow of funds from its banks and as investors dump the government debt of other European countries on concern they too will be infected by the sovereign debt crisis.
Credit-default swaps on Ireland increased 19 basis points to a record 599.5 and contracts on Spain soared 21 basis points to an all-time high 320.5, CMA prices show. Greece climbed 17 basis points to 988 and Italy rose 11.5 to 213.5.
Fund Tap
The European Central Bank and a majority of euro-region states are calling on Portugal to tap the European Financial Stability Fund, according to a Financial Times Deutschland report today. A Portuguese official at the office of Prime Minister Jose Socrates denied the report.
The Markit iTraxx Financial Index of credit-default swaps on the subordinated debt of 25 European banks and insurers jumped 19 basis points to a five-month high of 286, according to JPMorgan Chase & Co. The gauge is up from 179.5 Oct. 29, and is poised to record the biggest-ever monthly increase.
The senior index climbed 15 basis points to 172, while the region?s high-yield index increased 14 basis points to 496.
Irish Banks
The cost of protecting debt sold by Irish banks rose to records on concern bondholders will be forced to share the burden of the bailout of the nation?s financial system.
Credit-default swaps insuring Allied Irish Banks Plc?s senior bonds for five years rose 4.5 percentage points to 24.5 percent upfront and 5 percent annually, according to CMA. The upfront cost of protection on its subordinated debt climbed 4 percentage points to 68.2 percent.
Bank of Ireland Plc senior swaps rose 3 percentage points to 14.2 percent in advance, while contracts on its junior debt increased 4 percentage points to 45.9 percent upfront.
Default swaps tied to subordinated bonds issued by Spain?s Banco Santander SA rose 35 basis points to a record 430, CMA prices show.
?People are starting to question whether a stressed sovereign can credibly backstop a distressed banking system,? Davies said. ?It?s very hard not to draw parallels with Ireland. Investors who are pessimistic on Spain and its banking system may conclude that they are headed down a similar route.?
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.
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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