May 29, 2018 / 10:51 AM / in 19 days

Italy and other euro zone sovereign and bank CDS surge

LONDON (Reuters) - The cost of insuring exposure to debt issued by euro zone periphery sovereigns and banks across the bloc soared on Tuesday amid fears that political turmoil in Italy could spark wider euro zone troubles.

Italian five year credit default swaps (CDS) soared to 227 basis points (bps) up 51 bps from Monday’s close, to hit the highest level in 4-1/2 years, data from IHS Markit showed.

Italian CDS had traded at 96 basis points just before Italy’s two eurosceptic parties, the far-right League and the 5-Star Movement, appeared on the verge of a deal two weeks ago.

But following a standoff at the weekend between the two parties and the head of state which raises the prospect of fresh elections that become a de facto referendum on Rome’s euro membership, the market rout has engulfed countries elsewhere in the EU bloc.

Spanish CDS ESGV5YUSAC=MG jumped by 20 basis points (bps) from Monday’s close to 95 bps - the highest level in 22 months, while Ireland CDS IEGV5YUSAC=MG hit their highest in eight months at 33 bps.

CDS of euro zone banks - many of which have major exposure to Italian sovereign holdings - also rose sharply.

Italian banks took centre stage, with CDS in both UniCredit UNIC5YEUAM=MG and Intesa Sanpaolo BCIN5YEUAM=MG hitting 156 bps - rising 34 bps and 32 bps respectively - to their highest in more than a year.

According to data from French business school IESEG, sovereign exposure of both banks to Italy represents almost 150 percent of their core capital buffers (core equity tier 1). Figures published by Citi on Monday, the top six Italian banks have a 166.6 billion euros exposure to Italian sovereign debt.

Major French banks’ BNP Paribas, Credit Agricole CAGR5YEUAM=MG and Societe Generale SG5YEUAM=MG 5-year CDS also rose sharply, jumping 50 bps or more on the day. BNP Paribas BNPP5YEUAM=MG hit 93 bps - its highest since April 2017.

To view a graphic on Italian banks' sovereign bond holdings, click: reut.rs/2J4jMJ6

Reporting by Karin Strohecker, editing by Abhinav Ramnarayan and Richard Balmforth

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