Sovereign Debt
Sovereign Debt – Unsustainably high budget deficits in certain eurozone countries hit credit markets with a vengeance again yesterday, as the cost of insuring against losses on sovereign debt rose to a record high.
Concerns about the finances of Greece and Portugal and a looming general strike in Greece heightened investor fears.
Western Europe Index of credit-default swaps on the debt of 15 governments rose 8.5 basis points to 102.5, according to Deutsche Bank.
Five-year swaps on Greece stood at 396 basis points, or 3.96 percent, Thursday, while swaps on Portugal were at above 195 basis points, or 1.95 percent, according to Bloomberg. Swaps on Portugal stood at only 61 basis points in early September, while they were around 120 basis points for Greece.
In contrast, Turkish five-year swaps traded at 189 basis points Thursday, compared to around 225 basis points in early September.
Credit-default swaps are derivatives, contracts with values derived from assets or events, including stocks, bonds, commodities, currencies, interest rates or the weather. Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Tags: 10 Million, Basis Point, Basis Points, Budget Deficits, Commodities, Credit Default Swap, Credit Default Swaps, Credit Markets, Creditworthiness, Derivatives, Deutsche Bank, Early September, Eurozone Countries, Hedge Funds, Insurance Companies, Sovereign Debt, Stocks Bonds, Swap Contract, Vengeance, Western Europe
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