Greece’s Risk of Default Jumps to 98%

Greece

Greece has a 98 percent chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the euro-region crisis.

“Everyone’s pricing in a pretty near-term default and I think it’ll be a hard event,” said Peter Tchir, founder of hedge fund TF Market Advisors in New York. “Clearly this austerity plan is not working.”

It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.

German Chancellor Angela Merkel said she won’t let Greece go into “uncontrolled insolvency” as politicians try to limit contagion to other euro members. Papandreou’s pledge to adhere to deficit targets that are conditions of the European Union and International Monetary Fund’s bailout were undermined by data showing Greece’s budget gap widened 22 percent in the first eight months of the year.

The default probability for Greece is based on a standard pricing model that assumes investors would recover 40 percent of the bonds’ face value were Greece to fail to meet its obligations.

The nation’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three-year recession. Papandreou approved new measures to help repair the budget deficit at the weekend amid building resistance from Greeks.
Bonds Reverse Drop

Greece’s bonds rose, reversing declines that pushed the 10- year yield to 25 percent for the first time today.

The nation’s 10-year bond yield fell 22 basis points, or 0.22 percentage point, to 23.33 percent as of 17 a.m. in London, after earlier climbing to a euro-era record of 25 percent. The two-year note yield fell 319 basis points to 66.37 percent, dropping from an all-time high 74.88 percent.

Greek stocks fell yesterday, with the ASE Index tumbling 4.4 percent to 847.48, down more than a third from 1,286 on July 22.

The risk of contagion beyond Greece pushed sovereign credit-default swap prices to record highs across the euro region yesterday. European bank debt risk was also at the highest ever amid speculation French lenders will be downgraded because of their holdings of Greek bonds.
Sovereign Risk

The Markit iTraxx SovX Western Europe Index of credit- default swaps was unchanged at a record 354 reached yesterday. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was unchanged at 314 and the subordinated index stayed at 550, according to JPMorgan Chase & Co.

“The contagion impact of a default will be severe, because next in the firing line will be Italy, Spain and it will take in the whole of the European banking sector too,” Suki Mann, a strategist at Societe Generale SA in London, wrote in a note yesterday. “This trio are already under intense pressure, but it will get much worse.”

Credit-default swaps on Portugal, Italy and France surged to records yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Portugal jumped 79 basis points to 1,213, Italy rose 40 basis points to 503 and France was up 11 at 189.
German Banks

Chancellor Angela Merkel’s government is debating how to support German banks should Greece fail to meet budget-cutting terms of its rescue package, three coalition officials said Sept. 9. Credit-default swaps on BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s largest banks, surged to all-time highs yesterday on bets they’ll have their ratings cut by Moody’s Investors Service this week.

Swaps on SocGen were 53 basis points higher at 443, Credit Agricole increased 41 to 331 and BNP Paribas rose 31 basis points to 306, according to CMA.

Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Downgrades are likely as the review period concludes, said people with knowledge of the matter, who declined to be identified because the information is confidential.
Merkel Comments

Merkel made her comments in a German radio interview, according to the tran****** provided by Berlin-based broadcaster Inforadio.

The cost of insuring corporate debt fell from the highest level in 2 1/2 years, according to JPMorgan. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 0.5 basis point to 198 after rising yesterday to as high as 204.

Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings fell 7.5 basis points to 790, after touching 811.5 yesterday, the highest since May 2009. A decline signals improving perceptions of credit quality.

A basis point on a credit-default swap protecting 10 million euros ($13.6 million) of debt from default for five years is equivalent to 1,000 euros a year.

Swaps 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.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

El rescate griego

Por último, el presidente ha explicado las ventajas y los riesgos que conllevará prestar dinero a Grecia para ayudarla a salir de la crisis y propiciar la estabilidad de los mercados financieros y del euro.

España, si finalmente se confirma la necesidad de acudir al rescate griego, tendrá que aportar un total de 3.672 millones de euros. El préstamo tendrá una vigencia de tres años y, tal y como ha reconocido el presidente del Gobierno obligará al Tesoro Público a elevar el volumen de su emisión de deuda. Este aumento, ha dicho Zapatero, no será "perturbador" y lo ha situado en aproximadamente 3.300 millones de euros que se añadirán a la emisión neta prevista para 2010 que es de 76.800 millones de euros.

También ha admitido el presidente que esto implicará para España un coste de 73 millones de euros anuales, pero se verá compensado por los 183 millones que deberá pagarnos Grecia en concepto de intereses. En definitiva, el saldo debería ser positivo para españa en una cuantía de 110 millones de euros al año durante tres años.

No obstante, Zapatero también ha reconocido que la operación conlleva el riesgo de impago por parte de Atenas, aunque ha señalado que dicho peligro debería estar conjurado por el hecho de que la UE entera esté dispuesta a arropar al país mediterráneo.

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