AIG's credit default swaps shows rescue skepticism: JPMorgan

NEW YORK (Reuters) - A rise in credit default swaps on American International Group (AIG.N) debt indicates the market may be skeptical about a government program to support the insurer, JPMorgan said on Friday.

Over the past month, five-year credit default swaps on AIG have risen to 44 percent upfront from 29 percent upfront, retracing much of the rally seen immediately after the government announced an $85 billion rescue package in September, JPMorgan said in a report.

A 44 percent upfront level means it costs $4.4 million a year to insure $10 million of AIG's debt for five years, plus $500,000 in annual premiums.

The swaps traded around 53 percent upfront just before the rescue, JPMorgan said.

AIG was extended an $85 billion bridge loan by the government on September 16 as margin calls threatened the firm's solvency. The government extended nearly $38 billion more in another lending agreement earlier this month.

"AIG is burdened by the high cost of the government loan and a difficult market to sell assets necessary to pay down that loan," JPMorgan said.

"The large insurance companies that are potential buyers of AIG's assets are themselves struggling with asset quality issues," the bank

UBS also raised concerns about AIG's ability to sell assets, saying potential buyers are facing capital pressures due to deterioration in the credit and equity markets.. UBS cut its price target on AIG's stock to $1.70 from $5.

AIG shares were up 7.4 percent at $1.75 on Thursday near midday.

(Reporting by Dena Aubin; Editing by Leslie Adler)