Greek pact heightens default risk in Europe

Written by Bloomberg | Updated: Feb 28 2012, 09:18am hrs
The bailout that rescued Greece from a looming default has failed to restore confidence in credit markets, where traders are paying nine times more to insure European government bonds than they are for US treasuries.

While European stocks are off to their best start since 1998, the relative cost of credit default swaps has risen to a record, more than double the July level, according to CMA. To

obtain 130 billion euros ($175 billion) in aid to help pay interest on bonds due March 20, Greek prime minister Lucas Papademos agreed to reduce debt to 120.5% of GDP by 2020 from about 160% last year.

While chances of defaults and the breakup of the euro may have diminished, investors are no longer rewarding European governments for reducing spending to cut

debt as their economies shrink. US bond yields

have stayed near record lows and growth is accelerating as US President Barack Obama uses a different strategy, more than doubling the amount of outstanding debt to $10 trillion to fuel the recovery.

Bond markets dont believe in the same story that stock markets do, said Robin Marshall, director of fixed income in London

at Smith & Williamson Investment Management. Countries are still saddled with huge debt, are facing either economic downturn or recession.

The Markit iTraxx SovX Western Europe index of default swaps linked to 15 nations from Finland to Italy rose nine basis points in February to 348, up 34% since July, indicating a rising perception of risk. It reached an all-time high of 385 on November 25. The cost of insuring US debt dropped by more than 40% in that period. The ratio between the two rose a record 9.81-to-1 on February 23, up from 4-to-1 seven months ago and 1.6-to-one in 2009.