Greek Credit Swaps Surge; 91% Chance of Default -- Euro likely to Collapse soon

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Greek Credit Swaps Surge; 91% Chance of Default
By Abigail Moses - Sep 8, 2011 10:50 AM ET

Credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.

Five-year contracts on the country's sovereign bonds jumped 196 basis points to 3,001 basis points, at 3:45 p.m. in London, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Gross domestic product shrank 7.3 percent from a year earlier after declining 8.1 percent on an annual basis in the first quarter, the Hellenic Statistical Authority said. Greece's financial situation is "on a knife's edge," German Finance Minister Wolfgang Schaeuble told lawmakers last night, according to parliament's HIB bulletin.

"It's a combination of Greece continuing to disappoint and probably a growing realization among politicians that they're throwing good money after bad," said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. "They've finally woken up to the fact that they're not going to get this money back."

The default probability, which is based on a standard pricing model, assumes investors would recover 40 percent of the bonds' face value were Greece to fail to meet its obligations within five years.
Sovereign Swaps

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 2.5 basis points to 322.5. The gauge is approaching the record close of 327 basis points on Sept. 6. Swaps on Portugal jumped 19 basis points to 1,060, Ireland climbed 18 to 834 and Spain rose five to 396.

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

Greek two-year note yields jumped as much as 85 basis points to a euro-era record 55.76 percent today. The nation's 10-year yield climbed to an all-time high 20.13 percent.

Greece's economy has been hurt by spending cuts and tax increases introduced as a condition for a 110 billion-euro ($155 billion) European Union-led bailout last year, which have damped consumer demand. Finance Minister Evangelos Venizelos this week said the government will accelerate further austerity measures to ensure continued support after EU officials said payment of a sixth tranche of bailout loans will be withheld unless Greece meets its deficit targets.

It would be an "enormous mistake for the people of Greece," to fail to meet terms of the bailout, European Central Bank President Jean-Claude Trichet said today. "It's absolutely obvious that it's in the interest of Greece, in the interest of growth and jobs in the medium-term perspective, to do the adjustment."

German government officials have stepped up exhortations on Greece to hold to the terms of its rescue program after a quarterly review of the nation's progress by the EU and the International Monetary Fund was unexpectedly suspended for 10 days last week.

To contact the reporter on this story: Abigail Moses in London at Parmstrong10@bloomberg.net