April 7 (Bloomberg) — Credit-default swaps linked to Greece sovereign debt rose higher than those tied to Iceland for the first time, helping propel a benchmark indicator of U.S. corporate credit risk to its biggest jump in two weeks.
The Markit CDX North America Investment Grade Index Series 14 rose 2.4 basis points to a mid-price of 86.4 basis points as of 2:14 p.m. in New York, according to Markit Group Ltd. The index typically increases as investor confidence deteriorates and falls as it improves.
Swaps tied to Greece rose to 415 basis points today while those on Iceland traded at about 400 basis points, according to Markit data. The North American Markit index climbed the most since March 22 amid investor concern that contagion from a Greece default could spread to other assets, said Gavan Nolan, an analyst at Markit Group in London.
“The whole EU response to Greece has been quite fragmented,” Nolan said in a telephone interview.
Greece may default on its debt as early as this year without “extraordinary” financial assistance from the European Union and International Monetary Fund, said Stephen Jen at BlueGold Capital Management LLP.
The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, said Jen, managing director at the hedge fund, in an interview today in London. Greece’s austerity measures to narrow the European Union’s biggest budget deficit by gross domestic product may drive the Mediterranean nation into a recession, he said.
“A default may be ultimately unavoidable,” he said.
Iceland had to resort to a $4.6 billion IMF-led bailout after its three biggest banks collapsed in October 2008, leaving creditors wondering how they would recoup about $80 billion in debt.
Credit swaps pay the difference between the value of defaulted debt and its face value should the borrower fail to meet its obligations. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Investors use the Markit CDX index to hedge against losses on corporate debt or to speculate on creditworthiness.
To contact the reporter on this story: John Detrixhe in New York at firstname.lastname@example.org
Last Updated: April 7, 2010 14:17 EDT
By John Detrixhe