Shawcapfactoring
- Holders of credit-default swaps on Greek bonds shouldn’t tear up their
contracts after yesterday’s ruling against a payout.
The International
Swaps & Derivatives Association said the swaps hadn’t been triggered by
the European Central Bank’s exchange of Greek bonds for new securities exempt
from losses taken by private investors. The group will now probably be asked to
determine whether collective action clauses, or CACS, being used by Greece to
impel investors to participate in a wider exchange of bonds that would trigger
the swaps.
“They will have to enforce CACS,” said Alessandro Giansanti,
a senior rates strategist at ING Groep NV in Amsterdam. “At that point the
exchange will become coercive and that will be a restructuring event for CDS.”
The 130 billion-euro ($170 billion) bailout for Greece is
testing the sanctity of the market for credit-default swaps and their effectiveness
as a hedge against losses on government bonds. Policy makers including former
ECB President Jean-Claude Trichet have opposed paying the contracts because
they’re concerned that traders will be encouraged to bet against failing
nations and worsen Europe’s debt crisis.
Contracts tied to the debt of Greece signal a 95 percent
probability of default.
‘Crying Out’
Such thinking is misdirected, according to Nicholas Spiro,
managing director of Spiro Sovereign Strategy in London. A settlement on Greek
swaps may bolster confidence in the $258 billion sovereign insurance market and
help boost the government bond market, he said. Efforts to circumvent a trigger
risk undermining credit markets, Spiro said.
“The sovereign CDS market is crying out for an injection of
confidence because we are by no means out of the woods,” Spiro said. “It’s very
important, particularly in much larger bond markets like Italy and Spain, that
investors’ hedges are perceived to be credible.”
European leaders agreed to provide capital faster for the
planned permanent bailout fund in a concession to international pressure to
strengthen the bloc’s defenses against the debt crisis. Euro governments might
pay the first two annual installments into the 500 billion-euro fund this year
and complete the capitalization in 2015, a year ahead of schedule. A decision
will come later today.
Interest-Rate Swaps
Elsewhere in credit markets, Wells Fargo & Co. (WFC) sold
$2.5 billion of debt at almost half the relative yield that JPMorgan Chase
& Co. paid last month. The global speculative-grade default rate will rise
to 2.8 percent by year-end from 1.8 percent at the close of 2011, Moody’s
Investors Service said. The U.S. commercial paper market contracted to the
lowest level in more than a year.
The two-year interest-rate swap spread, a measure of debt
market stress, fell 0.4 basis point to 25.75 basis points. The gauge widens
when investors seek the perceived safety of government securities and narrows
when they favor assets such as corporate bonds.
The cost of protecting company debt from default in the U.S.
declined, with the Markit CDX North America Investment Grade Index, which
investors use to hedge against losses or to speculate on creditworthiness,
decreasing 1.3 basis points to a mid-price of 92.7 basis points. The Markit
iTraxx Europe Index of companies with investment-grade ratings rose 1.5 to
128.5, according to JPMorgan Chase & Co. at 10:30 a.m. in London.
Default Swaps Fall
The Markit iTraxx Australia index decreased 5 basis points to
137, Westpac Banking Corp. prices show. That’s on course for its lowest since
Aug. 5, according to data provider CMA. The Markit iTraxx Asia index of 40
investment-grade borrowers outside Japan declined 4 basis points to 157.
The indexes typically fall as investor confidence improves
and rise as it deteriorates. Credit-default swaps pay the buyer face value if a
borrower fails to meet its obligations, less the value of the defaulted debt. A
basis point equals $1,000 annually on a contract protecting $10 million of
debt.
While Moody’s is forecasting a faster default rate, the
estimate is below the 4.8 percent average since 1983, the New York-based
ratings firm said in a report yesterday. Standard & Poor’s is forecasting a
default rate of 3.3 percent by year-end, from 1.98 percent at the close of
2011, the ratings firm also reported yesterday.
Wells Fargo
Bonds of Wells Fargo were the most actively traded U.S.
corporate securities by dealers yesterday, with 175 trades of $1 million or
more, according to Trace, the bond-price reporting system of the Financial
Industry Regulatory Authority.
Wells Fargo issued 3.5 percent, 10-year notes that pay 150
basis points more than similar-maturity Treasuries, according to data compiled
by Bloomberg. On Jan. 13, JPMorgan sold $3 billion of 4.5 percent notes, also
due in 10 years, at a 270 basis-point spread, before issuing an additional $250
million of the debt five days later.
