CDS spreads on Icelandic banks hit new highs

The injection on Monday of €600 million from the Icelandic government to acquire 75% of Glitnir Bank has done nothing to ease fears over the bank’s future. Glitnir’s five-year credit default swap (CDS) spreads are now the highest of any European bank, reaching 4583.4 basis points on Thursday, up from 1820.7 bp the previous day.

Investor sentiment towards Glitnir’s main domestic rivals – Landesbanki and Kaupthing – was almost as gloomy. The cost of protection on Landesbanki rose to 3626.2bp by close of trading on Thursday, up from 1593.4bp, while Kaupthing’s CDS spreads widened from 1751.6bp to 2746.5bp.

Dexia, a Franco-Belgian bank, and Fortis, which is listed in Belgium, the Netherlands and Luxembourg, have also received injections of government funds in the past week - measures that seem to have had more of a stabilising impact. Dexia CDS spreads, which started the week at 550bp, tightened to 380bp on Thursday, while Fortis’ CDSs narrowed to 385bp from 412.5bp over the same period.

The cost of protection on major European banks also tightened, with the market reacting positively to the US Senate’s support of a revised $700 billion bailout package for the financial sector.

CDSs on UK banking giant HBOS – set to be taken over by Lloyds TSB – tightened to 284.2bp on Thursday from 328.3bp the previous day. Lloyds’ CDS spreads also came in, closing at 156.7bp yesterday from 185bp on Wednesday.

Despite the announcement of 2,000 job cuts, the cost of protection on UBS narrowed to 268.3bp from 280.8bp, while Royal Bank of Scotland’s CDS spreads closed at 275.8bp yesterday, from 292.5bp on Wednesday.

Despite the positive outcome of the Senate vote, there were mixed fortunes for US banks as the market awaits the US Congress re-vote on the amended bailout plan on Friday.

The move by Morgan Stanley to sell a 21% stake to Japanese financial group Mitsubishi UFJ earlier this week has done nothing to halt the upward climb of its CDS spreads, which widened to 1022bp on Thursday from 977.1bp the day before. But Goldman Sachs, which like Morgan Stanley recently applied to become a bank holding company, saw its CDS spreads tighten to 426.7bp yesterday from 443.3bp.

Citi, which agreed to buy Wachovia on September 29, saw its CDSs move out to 301.7bp on Thursday from 287.5bp on Wednesday. The cost of protection on Wachovia also widened to 390.8bp yesterday from 381.7bp, but was considerably tighter than the bank’s 1560.5bp CDS spread last Friday, before the Citi deal was confirmed.

The cost of protection on Bank of America, which struck a deal to buy Merrill Lynch for $50 billion on September 15, moved out to 170bp yesterday from 152.1bp on Wednesday. Conversely, Merrill’s CDS spreads tightened to 410.8bp from 432.5bp over the same period.

See also: CDS spreads widen despite bailout approval