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Corporate Debt Protection Costs Climb Amid Depression Concern
By Abigail Moses and Shannon D. Harrington
December 3, 2008

Dec. 3 (Bloomberg) -- The cost of protecting corporate debt from default jumped to a record in Europe and neared a high in the U.S. amid concern that the global recession will sink into a depression.

Credit-default swaps on a benchmark index tied to below- investment grade companies in Europe reached levels considered distressed for the first time. The cost to protect U.S. leveraged loans from default neared a record, and a benchmark gauge of credit risk tied to investment-grade companies including retailer J.C. Penney Co. and Alcoa Inc., the largest U.S. aluminum producer, also jumped as a private report showed the nation's companies last month cut the most jobs in seven years.

"Markets are pricing somewhere between a recession and a depression, and that is what we are faced with," said Philip Gisdakis, a Munich-based credit strategist at UniCredit SpA, Italy's biggest bank. "We are already in a recession. The next economic phase will not be recession, but depression."

Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada climbed 8 basis points to 267 basis points as of 10:10 a.m. in New York, according to Barclays Capital. The index is at the highest since Nov. 20, when it traded at a record 284 basis points, prices from broker Phoenix Partners Group show.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly sub-investment grade credit ratings increased 65 basis points to 1,005 and earlier reached a record 1,010, JPMorgan Chase & Co. prices show. The index traded above 1,000 basis points for the first time, a level investors consider distressed.

European iTraxx

The Markit iTraxx Europe index of 125 investment-grade companies rose 9 basis points to 195 after earlier trading at 198, which matched a record reached yesterday, according to JPMorgan.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should borrowers fail to adhere to their debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

UniCredit is forecasting a 35 percent chance of a global depression as deteriorating labor markets undermine consumer confidence.

Jobs Cut

Companies in the U.S. cut an estimated 250,000 jobs last month, according to an ADP Employer Services report. The decline, more than economists had forecast, was the most since November 2001. The U.S. economy has lost 1.2 million jobs in the first 10 months of the year, government reports show.

U.S. service industries contracted in November at the fastest pace on record, according to the Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the nation's economy. A survey of about 700 service companies in the U.K. showed that services from banks to recruiters contracted at the fastest pace in at least 12 years last month, Markit and Chartered Institute of Purchasing and Supply said today.

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as investor confidence deteriorates or as they hedge against losses, reached a record low. The index, tied to the loans of 100 companies including General Motors Corp. and Ford Motor Co., fell 0.9 percentage point to 75.9 percent of face value after earlier trading as low as 75.5, according to Goldman Sachs. The index reached a record low of 75.25 on Nov. 21.

Credit-default swaps on U.K. gilts and U.S. Treasuries also rose to records, according to CMA Datavision. Five-year contracts used to hedge against losses on U.K. government debt increased 6 basis points to 113.5 and 10-year contracts climbed 9 to 116.5. Five-year contracts on Treasuries rose 2.5 basis points to a record 60.5, CMA prices show.

To contact the reporters on this story: Abigail Moses in London; Shannon D. Harrington in New York at
Last Updated: December 3, 2008 10:39 EST

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