In These New Times

This is a dramatic move through which Germany have acted unilaterally by-passing EU structures. By the look of it, other countries may follow. Europe can only survive by erecting a firewall against City of London financial viruses.

Bloomberg

19th May, 2010

Credit-default swaps on Europe’s most indebted governments fell on concern Germany’s curb on using the contracts to insure sovereign debt will choke the market and devalue existing agreements.

Greek swaps tumbled 57 basis points to 557, Portugal dropped 22.5 to 249, and Spain fell 15 to 165, according to CMA DataVision prices. Corporate credit risk jumped on concern Chancellor Angela Merkel’s move will drive up borrowing costs in the region.

Germany stopped traders buying default protection on government bonds they don’t own, so-called naked swaps, as lawmakers prepare to debate a bill authorizing a $1 trillion bailout to backstop the euro. The ban may lead to a “regulatory noose” around the market, according to Jim Reid, a strategist at Deutsche Bank AG in London.

“The ban suggests massive political pressure on the regulators, sparking anxiety about excess regulation and undermining confidence,” said Stefan Kolek, a strategist at UniCredit SpA in Munich. “This will lead to higher borrowing costs, notwithstanding the fact that central banks have left the market with ample liquidity.”

The Markit iTraxx Crossover index of swaps on 50 European companies jumped 50 basis points to 582, according to JPMorgan Chase & Co. The index typically rises as investor confidence deteriorates.

Euro Slump

The unexpected ban, done independently of the European Union, came after the rescue package failed to stop the 16- nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another.

Concern other countries may adopt similar measures also weighed on markets, driving up the cost of protecting bank bonds from default. Belgian market regulator CBFA is consulting the committee of European Securities Regulators and the country’s government about whether to extend an existing ban on uncovered short positions in shares of financial companies to credit- default swaps on euro-area government bonds.

The Markit iTraxx Financial Index of 25 banks and insurers rose 10 basis points to 158 and the subordinated index climbed 15 to 230. Contracts on Germany’s Deutsche Bank AG increased 7.5 basis points to 155 and Commerzbank AG rose 9.5 to 134, CMA prices show.

The Netherlands is “monitoring the situation closely,” but has no plans for the time being to implement measures similar to the ban in Germany, Imre de Roo, a spokeswoman for Dutch financial markets regulator AFM, said today.

Credit-default 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. A basis point on a contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year.