Debt protection costs soar as markets eye shaky finances in

[joeblow]

Debt protection costs soar as markets eye shaky finances in Athens

http://www.smh.com.au/business/debt-pro ... -k3u1.html

ELENA MOYA
December 2, 2009

CONCERN over the state of the Greek economy has grown as nervous investors look for the next country that could be engulfed by a debt crisis.

Greece's budget deficit is expected to reach 12 per cent of the country's gross domestic product this year - far above European Union guidelines of 3 per cent - as the Government struggles to reform the economy and reduce public spending.

Markets are fearful Greece may fail to make the necessary cuts. The country's sovereign debt credit default swaps, the financial instruments that measure the price of protection against default, stood at 202 basis points on Monday, among the highest in the eurozone. The country's ratio of national debt to GDP is headed for 135 per cent.

Gavan Nolan, a credit analyst at Markit, the financial information provider, said: ''Greece has little chance of default, but investors are requiring more compensation to take on the risk, given the record budget deficit.''

Mr Nolan said investors were also requiring a premium because of a lack of confidence in the Government's economic forecasts, and because of the reliance of the country's banks on a European Central Bank funding program, which could be withdrawn over the next few months.

The cost of insuring Dubai against default rocketed last week after Dubai World announced that it might be unable to repay its debts. On Monday its sovereign debt credit default swaps spread fell to 580 basis points, from 634 on Friday, according to Markit. This means investors pay $580,000 to insure $10 million of debt. Any credit default swap rate above 500 basis points indicates a perception of trouble ahead, or a belief among investors that a country may not be able to pay its debts.

Ukraine's credit default swap rates are the highest in the world, at 1500 basis points, as the country is surviving on a lifeline provided by the International Monetary Fund.

''There is the probability of default for Ukraine, which could not meet the IMF conditions,'' Mr Nolan said.

Prices still rose for countries such as Britain, which, although unlikely to default, require a higher price of protection because of weak public finances. Britain's credit default swap rate is 73 basis points. At the height of the credit crunch this year Britain's credit default swaps traded at about 105 basis points, although recently the figure has been in the 40s. It still trades at more than twice that paid for France and Germany, which have stronger public finances.

The last countries to default on sovereign debt were Ecuador, last year, and Argentina in 2001.

Investors go to the sovereign CDS market as public finances deteriorate, for example following a state bailout of banks, such as took place in Britain, or after the credit crunch cut growth and tax revenues.

Guardian News & Media