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Spanish Debt Insurance Costs Surge as Downgrade Woe Weighs

Source: WSJ

Posted on 13 Jun 12 by Neilson

The cost of protecting Spanish sovereign debt against default neared a record high in early trading Friday in Europe after the country suffered a three-notch rating downgrade and concerns were raised about the cost of potentially bailing out its banks.

Fitch Ratings on June 7 in Europe cut Spain’s credit rating by three notches to BBB from A, citing the likely cost of restructuring and recapitalizing its ailing banking sector. Fitch estimates the burden could be as much as 100 billion euros ($125.74 billion)--equivalent to 9% of GDP--up from a previous estimate of EUR30 billion.

Spain’s high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece, the rating company said. It also said European policy mistakes have left Spain vulnerable to capital flight, and undercut its access to affordable fiscal funding.

Michael Symonds, an analyst at Daiwa Capital Markets, said, "The market clearly has no more patience for the Spanish government's piecemeal approach over recent months and years.

"The next few weeks are likely to prove pivotal for Spain, as well as the resolve of the euro area to come to grips with the crisis," he said.

Italian CDS also widened, jumping 18 basis points to be at 543 basis points. Market participants are also concerned about Italy's levels of indebtedness and possible contagion effects from Greece.

Credit default swaps are derivatives that function like an insurance contract for debt. If a borrower defaults, sellers compensate buyers.