Greek Debt Swap Counterparty Risk May ‘Spook’ Market
http://www.bloomberg.com/apps/news?p...YRugz.tQ&pos=2

Jan. 29 (Bloomberg) -- Greece’s economic woes will “spook” the derivatives market because of concern the nation’s banks may struggle to honor their credit-default swap trades, according to BNP Paribas SA.

Asset quality at the country’s lenders will deteriorate as the economy slows, forcing them to mark down about 40 billion euros ($56 billion) of government bond holdings, analyst Olivia Frieser wrote in a note to clients today. Funding costs are also rising as the European Central Bank tightens its lending criteria, Frieser wrote.

“What will spook the markets is CDS counterparty risk, our understanding is that Greek banks were active CDS players, and there is no way of finding out about these particular exposures,” the London-based analyst wrote. “As long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.”

The $26 trillion market for credit-default swaps is used by banks, hedge funds and insurers to insure against default and speculate on the creditworthiness of countries and companies. The counterparty risk is that one side of a contract isn’t able to meet its commitment.

Credit-default swaps on Greek sovereign debt and the nation’s banks soared this month on concern the country won’t be able to raise 53 billion euros this year to reduce a budget deficit of almost 13 percent of gross domestic product, the biggest shortfall in the European Union.

Five-year swaps insuring 10 million euros of National Bank of Greece SA debt today surged 46,000 euros to 419,000 euros, according to CMA DataVision prices.

Default Swaps

It now costs a $397,000 a year to insure $10 million of Greek government debt against default for five years, according to CMA, down from a record $422,500 yesterday. That compares with $34,000 for Germany and is the highest in the European Union.

The country’s new 8 billion euros of five-year bonds sold on Jan. 26 have tumbled. The spread on the notes, due August 2015, has widened to 445 basis points over similar-maturity German government notes, according to Bank of Greece prices on Bloomberg. They were issued at a spread of 380 basis points.

“The post-issue performance of the bond looks like a horror scenario to any government bond investor,” Tim Brunne, a strategist at UniCredit SpA in Munich wrote in a note to investors today.

French and Swiss banks had the most dealings with Greece as of the end of September, Frieser said, citing data compiled by the Bank for International Settlements.

French Banks

The French banks that have the largest Greek businesses are Credit Agricole SA, which owns Emporiki Bank of Greece SA, and Societe Generale SA, which has stakes in Geniki Bank SA and Hellas Finance, according to Frieser.

Investor concerns about Greece are spreading to nations including Portugal and Spain, which must both tame budget deficits. Claims of foreign banks, led by German lenders, on Spain represent 3.8 times those against Greece, meaning “the Spanish sovereign is indeed more important” than Greece, Frieser wrote.

German banks’ claims against Spain are $240 billion, with French banks at $196 billion, BNP said. Credit Agricole owns about 19 percent of Madrid-based Bankinter SA, according to Frieser.

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.