Britannia Radio

CDS report: European credit derivatives at record wides

European credit derivatives were trading at record wides on Tuesday amid growing worries over the implosion of a hedge fund or insurance group because of exposure to failed bank Lehman Brothers.

Many hedge funds and insurance groups sold protection to Lehman, the US investment bank which collapsed last month, and are now facing difficulties in repaying contracts, which must be settled in the coming weeks.

One trader said: “The next big story could be the implosion of a hedge fund. That is what the market is particularly nervous about at the moment.”

The iTraxx Crossover index, which tracks the debt of 50 mainly high-yield companies in Europe, was trading around 780 basis points, or 780,000 euros to protect 10m euros of debt over five years - a record wide - in a sign of the nervousness in the market place.

Meanwhile, European sovereign credit default swaps, a form of protection against default on government bonds, were also trading wide amid concerns over the high levels of debt governments will have to issue as they recapitalise the banking system.
The so-called peripheral nations of Greece, Italy, Portugal and Ireland are facing the greatest pressures along with Spain, where property prices have crashed.

Greek CDS prices over five years are trading around a record 95bp, while Italy and Ireland are trading around 80bp and Portugal and Spain around 70bp. These are twice the level such CDS were at before the collapse of Lehman, which imploded on September 15.

In contrast, the CDS prices of European banks have dropped dramatically in the past two weeks. Royal Bank of Scotland, Barclays and HBOS are all trading around 100bp compared with close to 500bp in the case of HBOS at the end of last month.

This entry was posted by David Oakley on Tuesday, October 21st, 2008 at 12:40 and is filed under Capital markets. Yo