CDS liquidity has fallen on euro zone woes -Markit

NEW YORK, May 21 (BestGrowthStock) – Liquidity in credit default
swaps backed by peripheral European nations including Greece,
Ireland and Portugal has significantly worsened in the past two
months as concerns about sovereign risk has increased, data
provider Markit said on Friday.

Concerns over contagion from Greece’s fiscal woes, which
culminated in the creation of a $1 trillion safety net to
protect the euro, have rocked credit markets in recent weeks
and sent the cost of protection government debt higher.

Germany’s surprise ban on Tuesday on buying CDS protection
on a country without also owning the underlying debt also
sparked renewed weakness in sovereign and corporate credit
markets.

As concerns over government finances rise, the gap between
the bid and offer for CDSs on peripheral European nations has
widened significantly, Markit said.

The bid/ask spread, which is the difference between a level
a dealer will buy or sell protection on a country or company’s
debt, is deemed an important indicator of liquidity. CDSs are
used to protect against losses if a borrower defaults on their
debt or to speculate on their credit quality.

The German ban “created some uncertainty in the market and
appears to have led to a disruption in liquidity,” Markit said
in a note. “Overall, the disproportionate widening in bid/ask
spreads in recent weeks suggests that liquidity has worsened.”

For example the average gap between bids and offers on CDSs
on Ireland’s debt has increased to 22 basis points on Thursday,
from 5 basis points on March 31, before concerns over sovereign
risk came to the fore, Markit said. This is an increase of 440
percent.

This compares with an 151 percent increase in the cost of
protecting Ireland’s debt to 221 basis points, or $221,000 per
year to insure $10 million in debt for five years, from 146
basis points in the same period, Markit said.

The bid/ask spread on Portugal’s CDS has also increased by
800 percent in the same period, compared with a 232 percent
rise in the cost of protecting the country’s debt, Markit
said.

Greece, Spain and Italy’s bid/ask spreads have also
increased by 379 percent, 425 percent and 267 percent,
respectively, while the countries’ CDS costs have climbed by
218 percent for Greece, 174 percent for Spain and 134 percent
for Italy, Markit said.
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(Reporting by Karen Brettell; Editing by James Dalgleish)

CDS liquidity has fallen on euro zone woes -Markit