May 21, 2010 / 4:08 PM / 8 years ago

CDS liquidity has fallen on euro zone woes -Markit

NEW YORK, May 21 (Reuters) - Liquidity in credit default swaps backed by peripheral European nations including Greece, Ireland and Portugal has significantly worsened in the past two months as concerns about sovereign risk has increased, data provider Markit said on Friday.

Concerns over contagion from Greece’s fiscal woes, which culminated in the creation of a $1 trillion safety net to protect the euro, have rocked credit markets in recent weeks and sent the cost of protection government debt higher.

Germany’s surprise ban on Tuesday on buying CDS protection on a country without also owning the underlying debt also sparked renewed weakness in sovereign and corporate credit markets.

As concerns over government finances rise, the gap between the bid and offer for CDSs on peripheral European nations has widened significantly, Markit said.

The bid/ask spread, which is the difference between a level a dealer will buy or sell protection on a country or company’s debt, is deemed an important indicator of liquidity. CDSs are used to protect against losses if a borrower defaults on their debt or to speculate on their credit quality.

The German ban “created some uncertainty in the market and appears to have led to a disruption in liquidity,” Markit said in a note. “Overall, the disproportionate widening in bid/ask spreads in recent weeks suggests that liquidity has worsened.”

For example the average gap between bids and offers on CDSs on Ireland’s debt has increased to 22 basis points on Thursday, from 5 basis points on March 31, before concerns over sovereign risk came to the fore, Markit said. This is an increase of 440 percent.

This compares with an 151 percent increase in the cost of protecting Ireland’s debt to 221 basis points, or $221,000 per year to insure $10 million in debt for five years, from 146 basis points in the same period, Markit said.

The bid/ask spread on Portugal’s CDS has also increased by 800 percent in the same period, compared with a 232 percent rise in the cost of protecting the country’s debt, Markit said.

Greece, Spain and Italy’s bid/ask spreads have also increased by 379 percent, 425 percent and 267 percent, respectively, while the countries’ CDS costs have climbed by 218 percent for Greece, 174 percent for Spain and 134 percent for Italy, Markit said. (Reporting by Karen Brettell; Editing by James Dalgleish)

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