With confidence in Citigroup Inc. falling fast, the spreads on the bank's credit default swaps are soaring. The costs of swaps to protect against a default by Citi went over 400 basis points for a time Wednesday, as issuers are increasingly concerned that the financial giant won't be able to make its debt payments as it undergoes a massive restructuring.
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The spread on Citi's CDSs rose over 100 points on Wednesday, according to
MarketWatch, on news that the bank may report a $10 billion fourth-
quarter loss and that it will merge its Smith Barney brokerage shop with Morgan
Stanley's brokerage units. The swaps were already at the relatively
high level of 262 basis points on Monday. The cost of the swaps ended the day at around 367 basis points, meaning buyers of swaps would have to shell out $367,000 to buy protection on $10 million in Citi debt.
With the stock taking a beating ahead of the Friday earnings
announcement, expect issuers to keep demanding more to protect against a
Citi default unless the bank can do something dramatic to restore the
market's confidence in its prospects. -
George White
See MarketWatch story on Citi swaps
See Dealscape post on Citi restructuring
