BP CDS costs surge, led by short-dated contracts

NEW YORK, June 16 (Reuters) - The cost of buying protection on BP Plc (BP.L) (BP.N) surged on Wednesday, with the largest jump in less liquid shorter-dated contracts, as banks and other companies exposed to the oil giant focused on short-dated risks.

Credit default swaps insuring BP's debt for one year jumped to more than 975 basis points, or $975,000 to insure $10 million in debt, from 640 basis points at Tuesday's close, according to Markit Intraday.

The cost of buying protection in five-year contracts, which are typically much more liquid than swaps of other durations, jumped to a new high of 617 basis points, from around 494 basis points on Tuesday, Markit data showed. This means it would cost $617,000 per year to insure $10 million in bonds for five years.

The jump in shorter-dated contracts indicates that traders view any potential BP failure as more likely to happen in the short term than longer term, in the event it happens at all.

The move also comes after Bank of America Merrill Lynch (BAC.N) this week ordered its traders not to enter into oil trades with BP that extend beyond June 2011, a market source familiar with the directive told Reuters. For details, see [ID: nN15104614]

Fears that BP's liability for the massive oil spill in the Gulf of Mexico will continue to grow has sparked volatile moves in BP's debt and stock.

U.S. President Barack Obama on Tuesday vowed that BP would pay the price for its "recklessness" in the Gulf of Mexico oil spill and sought to harness public outrage over the disaster to build momentum for his goals of a "greener" energy future. [ID: nN14163920]

Some argue, however, that the CDS moves are exaggerated and do not reflect the real risks that BP could struggle to meet its obligations. Fitch Ratings, which on Tuesday cut its ratings on BP by six notches, said on Wednesday it believes the CDS moves are overdone.

Risk management firm Kamakura Corp also deemed the risk of a BP default as low, ranking the company as having a 0.14 percent probability of defaulting in the coming year, and 0.06 percent likelihood of defaulting over five years. (Reporting by Karen Brettell; Editing by Leslie Adler)