November 15, 2010

Corporate Debt Safer Than Euro Zone Sovereign Debt

Shift signals reversal of economic 'old guard'

Europe’s sovereign debt crisis has turned the region’s credit markets upside down, with companies now the safest ever relative to governments.

“In the old order, sovereigns were tighter than corporates,” Greg Venizelos, a credit strategist in London at BNP Paribas SA, told Bloomberg. “There’s been a repricing and corporates are now better credit quality than sovereigns in the periphery.”

According to the news service, 33 companies in an index of credit-default swap prices are less risky than governments, including six each in Spain and Italy. The index of 125 European companies dropped last week to a record 76 basis points lower than an index of sovereigns from Greece to Germany.

Credit-default swaps, which investors use to insure against losses or speculate on creditworthiness, show how non-financial companies have shrugged off the worst effects of the budget-deficit crisis that has roiled nations. Bloomberg says companies with diversified or stable revenue and strong balance sheets have become the new havens amid concern that Europe’s so-called peripheral countries will need bailouts.

Government bonds are also tumbling on concern European nations will struggle to reduce budget deficits and as politicians debate whether a new mechanism to handle future crises should force investors to share losses. Irish Central Bank Governor Patrick Honohan said last week that loan losses at the country’s banks, including foreign-owned lenders, total at least 85 billion euros.

Bloomberg notes Irish 10-year government bonds fell for 13 straight days before recovering on Nov. 12 and also climbing today. The difference between Irish yields and benchmark German rates widened to a record 652 on Nov. 11, before narrowing, while the Portuguese-German spread expanded to an all-time high of 484 basis points on Nov. 11.

The yield gaps compare with the record 973 basis-point premium on Greek 10-year notes on May 7, before the European Union crafted a 750 billion-euro rescue package for the nation.

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