April 28, 2010, 8:54 p.m. EDT · Recommend (1) · Post:

European CDS spreads drop on bets of Greek bailout

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By Laura Mandaro, MarketWatch

SAN FRANCISCO (MarketWatch) -- Credit-default swaps spreads for southern European countries fell Wednesday, as better prospects for a bailout of Greece overshadowed Standard & Poor's downgrade of Spain.

Five-year CDS spreads for Greek debt fell 69.5 basis points, or 8%, to 754.28, according to CMA DataVision, meaning it would cost about $754,280 a year to buy default protection on $10 million in Greek sovereign debt. That's still far higher than the equivalent spread for most developed countries' sovereign issues.

Merkel Says Euro Stability Is at Stake

Germany's Chancellor Angela Merkel says Greek aid talks need to be accelerated and calls for Greece to do its homework if Germany is to step in on behalf of the euro.

Portuguese, Italian, Irish and Spanish CDS spreads also fell, CMA said.

The tightening stemmed from "profit-taking and players getting long ahead of an expectation of an imminent concrete bailout by the end of the weekend," said Abdullah Karatash, a vice president in trading for brokerage Natixis.

A drop in spreads for CDS indicates institutions have lowered their cost for offering protection on the risk of a corporate or sovereign debt default.

Spain's sovereign debt spreads fell 22 basis points, or 11%, to 187.l8, according to CMA.

Portugal's CDS spreads fell 56.78 basis points, or 15%, to 329.14.

Ireland's CDS spreads slid 27.25 basis points, or 11%, to 219.29. And Italy's CDS fell 9.38 basis points, or 6%, to 150.49.

On Wednesday, European Union officials sought to reassure investors that Greece would be able to access an aid package soon. German Chancellor Angela Merkel said talks to provide aid must be accelerated and that she hoped the talks can conclude in a few days.

Comments from Merkel earlier this week had sparked a fresh round of doubts as to whether EU heavyweights would stand behind a $60 billion bailout from the EU and International Monetary Fund. See story on Greek aid talks.

Greece's bond yields have soared, with yields on the two-year note at a whopping 21% Wednesday, a day after Standard & Poor's downgraded Greece's sovereign debt ratings to junk.

On Wednesday S&P also lowered the ratings on debt issued by Spain, another country whose budget deficit, as a portion of its economic growth, has unsettled investors in its public bonds.

Karatash said that exposure by French and German banks to Spain increase the likelihood that European nations would agree to a rescue package soon.

"The buck likely stops here," he said.

Laura Mandaro is a MarketWatch editor, based in San Francisco.