Greece Leads Surge in Sovereign Default Swaps on Deficit Woes

 Credit-default swaps on Greek sovereign debt surged to a record on concern the government won’t be able to plug the largest deficit in the European Union, a day after it priced 8 billion euros ($11 billion) of bonds.

Contracts on Greece soared 48 basis points to 373, according to CMA DataVision. Swaps on Spain rose 17 basis points to 127, Portugal climbed 18.5 to 149 and Italy was up 10 basis points at 114, CMA prices show.

The European Commission said today that Greece hasn’t done enough to rein in its deficit that reached 12.7 percent of gross domestic product in 2009. Greece denied a Financial Times report it’s wooing China to buy as much as 25 billion euros of bonds.

“Who’s going to lend money to them next time and at what price?” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. “What’s happening is very negative and could lead to a vicious circle.”

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments from Germany to Greece rose 9.25 basis points to a record 87.25, according to London-based CMA. That means it costs $87,250 a year to insure against losses on $10 million of debt for five years.

Greece’s new five-year bonds fell in the first day of trading. The spread on the notes, due August 2015, widened 35 basis points to 385 over the benchmark mid-swap rate, according to Markit Ltd. iBoxx prices on Bloomberg.

“Technically, the term is that it’s getting smacked,” said London-based Jenkins.

Greece sold almost 75 percent of the notes to international investors, including from the U.K. and France, the head of the nation’s debt agency said.

Debt Allocation

U.K. investors bought more than 29 percent of the 8 billion euros of notes sold via banks, according to Spyros Papanicolaou, director general of the Public Debt Management Agency in Athens. French investors purchased almost 8 percent and domestic buyers acquired more than 26 percent. The government said it received 25 billion euros of orders.

Greece, which had its credit rankings cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings last month, needs to raise 53 billion euros this year. The government gave plans to the European Commission on Jan. 15. designed to reduce the shortfall to within the EU’s 3 percent limit.

The yield on the Greek 10-year bond rose 44 basis points to 6.68 percent as of 4:35 p.m. in Athens, with the difference in yield, or spread, against German bunds increasing by 46 basis points to 350 basis points, the widest since December 1998.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. An increase signals deterioration in perceptions of credit quality.

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.