Corporate Borrowing Costs Surge to Record on Depression Scare

Corporate borrowing costs surged to a record in Europe on concern the credit crisis will deepen into a global depression.

Investors are demanding the highest yields relative to government debt to buy European investment-grade corporate bonds. The spread widened 20 basis points to 442 basis points this week, beating the previous record of 438 basis points on Dec. 26, according to Merrill Lynch & Co. data.

“Investors are scared that a 1930s style depression is no longer a mere tail-end risk,” said Georg Grodzki, head of credit research at Legal & General Group Plc, which manages more than 110 billion pounds ($156 billion) of assets. “It is easy to see why even some real-money investors are running for the exit because of waning confidence in the effectiveness of the measures being taken.”

Governments from the U.S. to Australia have sought to introduce policies to bolster their economies as a deepening global recession sent stocks in the MSCI World Index to a 24 percent plunge this year, the worst start to a year since the gauge was created in 1970. A Labor Department report today may show employers in the world’s largest economy cut payrolls by 650,000 and the unemployment rate surged to a 25-year high of 7.9 percent, according to a Bloomberg News survey.

The cost of protecting bonds sold by European banks and insurers from default surged to records on concern they will have to add to the almost $1.2 trillion of losses and writedowns financial companies worldwide have taken since the start of the credit crisis.

Financial Index

The benchmark Markit iTraxx Financial index of credit- default swaps linked to the senior debt of 25 banks and insurers jumped 7 basis points to a record 202, according to JPMorgan Chase & Co. prices. The subordinated index surged 20 basis points to an all-time high 385.

“Investors in financial companies feel like they’ve gone 10 rounds with Mike Tyson, they’re so beaten up,” said Gary Jenkins, a strategist at Evolution Securities in London. “If you can’t restore confidence in financials, you can’t restore confidence in the economy. We’re in the middle of a crisis of the global financial system.”

A Merrill Lynch & Co. index showing the yield premium investors demand to hold the lowest-rated debt issued by European insurers had its biggest gain this year, soaring 92 basis points to 2150. A gauge showing the spreads on similar debt at banks jumped 90 basis points to 3426.

Default Concern

Investor concern that defaults among companies with high- risk, high-yield credit ratings will soar as economies slow drove the benchmark Markit iTraxx Crossover index of credit-default swaps on 50 sub-investment grade companies in Europe 12 basis points higher to a record 1,165. The index traded as low as 189 basis points at the start of the credit crisis in June 2007.

The default rate on speculative grade companies rose to 5.2 percent in February, up from 4.8 percent a month earlier, Moody’s Investors Service said yesterday. The default rate will rise to 22.5 percent in Europe and 13.8 percent in the U.S. by the end of the year, Moody’s said, the highest since the 1930s.

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 a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting 10 million euros ($12.7 million) of debt from default for five years is equivalent to 1,000 euros a year.