Bank Bond Default Risk Rises on SocGens Subprime Writedown
The risk of European banks
defaulting rose after writedowns at Societe Generale SA linked
to U.S. subprime mortgages sparked concern of further losses as
financial firms start reporting earnings this week.
Credit-default swaps on Paris-based Societe Generale,
Frances second-biggest bank, jumped 5 basis points to 75,
according to CMA Datavision, and Dutch lender ING Groep NV
increased 8 to 76. The benchmark Markit iTraxx Financial Index
of 25 banks and insurance companies increased 5 basis points to
69, according to JPMorgan Chase Co.
Societe Generale, which said trader Jerome Kerviel was
responsible for a 4.9 billion-euro ($7.2 billion) loss last
week, also wrote down 1.1 billion euros linked to subprime
mortgages, 550 million euros related to U.S. bond insurers, and
400 million euros on other unspecified risks. Brussels-based
Fortis shares dropped to the lowest since August 2002 on Jan. 25
after Dresdner Kleinwort cut its recommendation on the bank on
concern it may report home-loan losses.
Some European banks have not given as much information as
U.S. banks over the last quarters about their writedowns, said
Willem Sels, head of credit strategy at Dresdner Kleinwort in
London. There is a lot of opacity in that we dont know who is
going to report what. Opacity does not lead to confidence.
Debt Speculation
Credit-default swaps are financial instruments based on
bonds and loans that are used to speculate on a companys
ability to repay debt. They pay the buyer face value in exchange
for the underlying securities or the cash equivalent should a
borrower fail to adhere to its debt agreements. A rise indicates
deterioration in the perception of credit quality; a decline,
the opposite.
Contracts on Zurich Insurance Co., Switzerlands largest
insurer, increased 8 basis points to 80 today, according to CMA.
Credit Suisse Group, the second-largest Swiss bank, rose 2 to
67, and Deutsche Bank AG, Germanys biggest lender, increased 1
basis point to 61.
You know youre going to get bad news, said Geraud
Charpin, head of European credit strategy at UBS AG in London.
What you dont want is the very bad news.
Fortis said yesterday that it meets capital and solvency
requirements even when its holdings in subprime collateralized
debt obligations are valued under very stringent scenarios.
The shares rose 60 cents, or 4.54 percent, to 13.81 euros at 10
a.m. in Amsterdam. Fortis credit-default swaps rose 8 basis
points to 81, according to CMA.
The Markit iTraxx Crossover Index of 50 companies with
mostly high-risk, high-yield credit ratings rose 20 basis points
to 460 today, according to JPMorgan.
The Markit iTraxx Europe index of 125 companies with
investment-grade ratings increased 5 basis points to 75,
JPMorgan prices show.
A basis point on a credit-default swap contract protecting
10 million euros ($14.7 million) of debt from default for five
years is equivalent to 1,000 euros a year.
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