Wall Street Journal
July 22, 2011
The cost of insuring European sovereign and corporate debt against default fell sharply Friday as credit markets continued to react positively to the agreement by euro-zone leaders to support Greece and contain the debt crisis.
The SovX Western Europe index, which investors can use to buy or sell default protection on 15 sovereign borrowers, was recently 0.25 percentage points tighter at 2.35/2.40 percentage points, according to index owner Markit.
Five-year credit default swaps written on peripheral euro-zone sovereigns were also sharply lower. Greek five-year CDS fell over 3.75 percentage points to 16.75 percentage points. Portugal was over 1.60 percentage points tighter at 8.05 and Italy and Spain were both nearly 0.40 percentage points tighter at 2.16 and 2.70, respectively.
A CDS functions like a default insurance contract for debt. A tightening of 0.01 percentage point in five-year CDS spreads equates to a $1,000 decrease in the annual cost of protecting $10 million of debt for five years.
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