ECONOMY

Greece credit swaps surge to signal 70 pct probability of default

Greek sovereign bond risk is soaring as newly elected Prime Minister Alexis Tsipras seeks to overhaul the country’s debt agreements.

Credit-default swaps now signal a 70 percent probability the government will fail to meet its obligations within five years, up from 59 percent on Jan. 23. The contracts resumed trading in July for the first time since Greece undertook the biggest sovereign debt restructuring in 2012.

Sellers of default insurance paid out about $3 billion when Greece forced investors to exchange bonds at a loss as part of the restructuring. Tsipras promised to avoid a “catastrophic clash” with creditors and European governments, while maintaining a pre-election pledge to renegotiate terms of Greece’s 240 billion-euro ($273 billion) rescue.

“Some form of restructuring on the publicly-held debt is likely,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Investors may be worried that privately-held debt could be included.”

A total of 743 swaps contracts covering $759 million of Greek debt were outstanding at the end of last week, according to the Depository Trust & Clearing Corp., which runs a central registry for the market and publishes data for the 1,000 most-traded entities.

Buying Protection

Default swaps insuring $10 million of Greece’s debt for five years now cost $4.2 million in advance and $100,000 annually, according to CMA data. That’s up from $3.4 million in advance on Jan. 23, the last trading day before the election.

Investors started buying protection again after the nation returned to the international bond market in April after a four-year exile. The nation’s 10-year bonds have slumped since the election and now yield more than 10.5 percent, according to data compiled by Bloomberg.

Greek corporate bonds have also fallen. The 500 million euros of 5.5 percent notes sold by Public Power Corp., the nation’s biggest electricity provider, dropped 8.4 cents on the euro to 70.5 cents, the lowest since the notes were issued in May. Refrigeration company Frigoglass SAIC’s 8.25 percent bonds slid 7.2 cents to 75.8 cents. Piraeus Bank SA’s 500 million euros of three-year bonds fell 4.9 cents to 75 cents, the lowest since they were issued in March.

“We’re entering a much more uncertain political and economic environment for Greece, and quite possibly the euro zone too,” said Nicholas Spiro, the managing director of Spiro Sovereign Strategy.

[Bloomberg]