CDS spreads widen despite bailout approval

Credit default swaps (CDSs) on a number of major dealers widened yesterday in spite of the US Senate vote on a revised $700 billion financial rescue plan.

The Credit Derivatives Research Counterparty Risk Index, which averages the five-year credit default swaps (CDS) spreads of the 15 largest credit derivatives dealers, dropped slightly to 356 basis points yesterday, down from 359.7bp on Tuesday, though this figure was distorted somewhat by intraday tightening of spreads on Morgan Stanley.

Wachovia, which was bought by rival Citi on September 29, saw its five-year credit CDS spreads widen to 381.7bp yesterday from 363.8bp the day before, but they remained significantly lower than the 1560.5bp recorded on Friday. CDSs referencing Citi widened to 287.4bp from 286.2bp over the same period, according to Bloomberg.

The cost of protection on Goldman Sachs, which, along with Morgan Stanley, applied to the US Federal Reserve to become a bank holding company on September 22, rose to 443.3bp by close of trading yesterday, from 428.3bp the day before. Morgan Stanley’s CDS spreads, which traded at 963.7bp on Tuesday, also widened, to 977.1bp.

Bank of America, which agreed to buy Merrill Lynch on September 15, saw its CDS spreads move out slightly to 152.1bp yesterday from 151.7bp on Tuesday and the cost of protection on JP Morgan rose from 141.7bp to 145bp. Meanwhile, the cost of protection on insurance giant American Insurance Group widened to 1421.2bp from 1418.9bp.

In Europe, the cost of protection on the Royal Bank of Scotland rose to 292.5bp yesterday from 287.9bp on Tuesday, while CDSs on UK banking giant HBOS widened to 328.3bp from 312.5bp. The cost of protection on Lloyds TSB also climbed, from 182.2bp to 185bp.

CDSs on Barclays tightened from 267.5bp on September 30 to 253.3bp yesterday, as did those on HSBC, which dropped from 111.7bp to 105.4bp in the wake of 1,100 job cuts.

Franco-Belgian bank Dexia, which received a €6.4 billion bailout package from the Belgian, French and Luxembourg governments on Tueday, saw its CDS spreads tighten to 380bp from 425bp on Tuesday. The cost of protection on pan-European financial services group Fortis, which was partly nationalised over the weekend, fell from 326.7bp to 300bp.

On September 30, the Irish government announced an unlimited guarantee for all forms of deposits and loans originated by domestic financial institutions, boosting market confidence in banks affected by the legislation. CDSs on Allied Irish fell from 350bp on Monday to 135bp on Tuesday and 131.7bp yesterday while Bank of Ireland saw its CDS spreads tighten from 377.5bp to 148.3bp.

The cost of protection on Icelandic bank Glitnir continued to rise, despite the announcement of a €600m governmental rescue package on Monday. CDSs on the bank reached 1820.7bp yesterday from 1490.5bp on Tuesday. Local rival Landsbanki, which sold a majority of its international operations to Straumur-Burdaras in a €380 million deal yesterday, saw its CDS spreads widen to 1593.4bp from 1296.9bp over the same time frame. Rating agencies Standard & Poor's and Fitch downgraded all Icelandic banks this week.

European financial stocks rose this morning after the US Senate voted 74-25 in favour of an amended version of the $700 billion rescue plan, which will go before Congress within the next few days. Several additions have been made to the bill, including temporarily raising the limit on federal deposit insurance to $250,000 from $100,000, as well as a proposal that would see $150 billion in individual and business tax cuts over the next decade.

See also: Hope for markets as Senate rescues bailout
CDS spreads tighten as bailout is revised

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