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The perceived riskiness of European corporate debt increased on Tuesday as traders in credit default swaps, worried the credit squeeze will ripple from banks to the wider economy, drove spreads wider.

Concerns for banks’ balance-sheets were exacerbated yesterday when the one-month sterling Libor rate hit a nine-year high. There were growing signs that tightening credit was hitting consumer demand as restaurants, credit card businesses and property funds began to feel the strain.

The iTraxx Crossover index of mostly junk-rated corporate debt widened 6 basis points to 364bp, meaning it now costs €6,000 more than it did on Monday to protect €10 million worth of Crossover debt against default over five years. The iTraxx Europe index of investment grade corporate debt widened 2bp to 56.5bp.

But analysts at BNP Paribas said the widening trend had much further to run. “Corporates’ cash spreads reached a new four-year record on Friday and we believe that CDS should follow soon. Concern regarding future earnings is likely to start affecting equities again and worsened by the pre-holiday lack of liquidity, consequently sending CDS spreads wider,” said the team in a note to clients.

On a brighter note, GlaxoSmithKline was on the verge of issuing a new two-part euro benchmark bond issue in the midst of a near-frozen primary market.

Credit Suisse, Deutsche Bank and Lehman Brothers are managing the sale of the 5- and 10-year fixed-rate bonds, rated AA, with the proceeds to be used for general corporate purposes.

“It shows that at least for the right deal and the right price, there is still a market out there for new issues,” a source close to the deal said.

GlaxoSmithKline’s credit default swaps widened by 10 basis points as the news leaked out.