Greece, Portugal Woes Intensify

By AINSLEY THOMSON, MARK BROWN And EMESE BARTHA LONDON—The cost of insuring the debt of euro-zone members with large budget deficits against default rose Thursday, dashing hopes that the European Commission's qualified endorsement of Greece's budget plan would calm investor fears. Greece, Portugal and Spain were in focus, with their five-year sovereign credit default spreads moving sharply wider. Greece's five-year sovereign credit default swap spreads were recently at 4.14 percentage points, compared with Wednesday's closing level of 3.97 percentage points, according to to CMA DataVision. That means the annual cost of insuring €10 million of Greek government debt against default for five years had risen €7,000 to €414,000. More View Full Image Petros Giannakouris/Associated Press Greek Prime Minister George Papandreou spoke during a financial conference in Athens on Tuesday. Marketbeat: Who's Next? Spain? Spain: We're Not Greece Heard: Market Has Upper Hand in Deficit Battle Journal Community Vote: Do you think Greece can escape its problems without a euro-zone bailout? Portugal's five-year sovereign CDS spreads were at 2.09 basis points—their widest level ever—after closing Wednesday at 1.96 percentage points. Spain's sovereign CDS spreads widened to 0.12 percentage point to 1.64 percentage points. The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only €300 million of treasury bills at an auction, compared with an indicative offer of €500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. Spreads on a credit default swap index of developed European sovereign borrowers rose above 1.00 percentage point for the first time Thursday, driven by further weakness in Spain and Portugal. The SovX Western Europe index, which lets investors buy or sell default insurance on a basket of 15 sovereigns, widened beyond 1.00 percentage point Thursday morning, compared with .925 percentage point late Wednesday. Gavan Nolan, vice president of credit research at index-owner Markit, said there was "panic buying" in the sovereign CDS market. The 10-year yield spread between Portuguese government bonds, or OTs, and German bunds widened briefly to 1.75 percentage point early Thursday, up from 1.43 percentage point at Wednesday's close, before retreating to 1.69 percentage point. The 1.75 percentage-point level is close to the highest closing level of 1.78 percentage point registered in March 2009. Portuguese spreads have more than doubled this year from .68 percentage point at end-2009. Greek 10-year spreads over German bunds were relatively quiet Thursday at 3.55 percentage point versus 3.51 percentage point at Wednesday's close, but below the all-time high of 4.05 percentage point reached last week. Spanish 10-year spreads over bunds were at 0.94 percentage point versus 0.87 point point at Wednesday's close. Spanish and Portuguese stock markets fell sharply for the second consecutive day, with banks leading decliners on sovereign debt worries. At 0920 GMT, Spain's IBEX-35 index was down 2% at 10659.5, while Portugal's PSI-20 was down 3.2% at 7575.8. Meanwhile, stocks in Athens were down 2%. In the foreign exchange market, the euro hit a seven-month low against the dollar, dropping to $1.3831. CDS are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. —Jonathan House and Alkman Granitsas contributed to this article.