Europe's growing political risks are reviving a moribund corner of the credit market.
Trading in credit-default swaps tied to French, Italian and Dutch sovereign debt has surged this year as populist parties garner electoral support by bashing the euro and European Union. That's stemmed a long-term slump in trading of contracts insuring European government debt that was spurred by tougher regulations in 2012.
Swaps tied to French debt have posted some of the biggest trading increases, with weekly average volumes more than doubling this month versus January, to $1.1 billion, according to data from Depository Trust & Clearing Corp. Marine Le Pen, who leads in polls for the first round of France's presidential election in April, wants to break up the euro and replace it with new national currencies.
Recommended For You
"It makes sense that there's increased interest in sovereign credit swaps as redenomination risk is resurfacing," said Lyn Graham-Taylor, a rates strategist at Rabobank International in London.
Trading of swaps on Italian debt reached $5.3 billion in the last week of January, the highest in more than a year, based on DTCC data. It has averaged $3 billion per week since then. Contracts insuring $135 million of Dutch sovereign debt changed hands last week, an increase of almost 80% versus a week earlier, the data show.
Still, volumes are well down from before 2012, when the EU banned traders from buying swaps on member states' debt unless they held the underlying securities. In February 2011, for instance, $2.6 billion of contracts tied to French debt changed hands each week on average, DTCC data show. There was an average of $3.6 billion for Italy and of $345 million for the Netherlands.
"The popularity of CDS as a hedging tool has decreased a lot in recent years," Graham-Taylor said. "Liquidity has declined."
Rising Costs
The recent rebound in trading has also seen an increase in the cost of insuring debt. Five-year swaps on France have jumped to 70 basis points, the highest since 2013, after climbing 30 basis points this month, according to data compiled by Bloomberg. Italian swaps are at 183 basis points, also near a four-year high, while contracts on the Netherlands are at 28 basis points, close to the highest since July, the data show.
Polls suggest Le Pen won't become the next French president as they predict she will lose the run-off ballot on May 7. Investors looking for protection against the risk of an upset should buy five-year swaps on French debt written under 2014 rules rather than the 2003 standards, Citigroup Inc. credit strategists including Aritra Banerjee wrote in a note last week. Language in the newer contracts increases the likelihood of compensation for losses following a currency change, they said.
Bloomberg News
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
