News of lower-than-expected writedowns at Barclays failed to quell fears of further pain in the banking sector on Thursday, with European credit derivatives markets remaining on the defensive.
Barclays announced a writedown of £1.3bn on its exposure to the US subprime mortgage market — much lower than traders had feared. On Friday, rumours that Barclays was about to reveal a $10bn writedown sent the cost of protection on the bank’s debt soaring and its shares tumbling.
Barclays joins a growing list of banks such as Merrill Lynch, Citigroup, and Bear Stearns, who have revealed billions of dollars of losses related to the mortgage market and related securities.
But while Barclays’ disclosure helped lower the cost of protection on the bank’s debt — to 55 basis points from 65bp on a five-year credit default swap — it failed to shore up confidence in the financial sector as a whole. People in the market said that only a fraction of subprime losses have been made public so far.
“If you add up all the writedowns so far it comes to about $50 billion – but the realised losses are expected to total $250 billion,” said Mehernosh Engineer, senior credit strategist at BNP Paribas.
Engineer said that writedowns would continue to shake the market until the first quarter of 2008, and possibly beyond.
The iTraxx Crossover, a closely watched measure of risk appetite, widened by about 8.25bp to 367bp in morning trade, according to data from Deutsche Bank, meaning it now costs €367,000 annually to protect €10 million worth of mostly junk-rated corporate debt against default in a five year contract.
The iTraxx Europe index of 125 investment-grade names widened to about 50.25bp, against a close of 49.3bp on Wednesday.