European credit markets were boosted on Monday by growing hopes that US plans to deal with banks’ toxic assets will help revive the economy and avert a deep recession.
The Markit iTraxx Crossover index, the main gauge of credit sentiment in Europe, comprising CDS on 45 mostly high-yield names, tightened by 21 basis points compared with Friday’s close, to settle at 904bp by noon, while Markit’s investment grade iTraxx Europe index tightened by 7bp compared with Friday’s close, trading at around 164bp.
The iTraxx indices track credit default swap prices of leading companies in Europe, where 1bp equals a cost of €1,000 to insure €10m euros of debt annually on a five year contract.
Details emerging Monday of US plans to launch a scheme to clean up the balance sheets of the banks, with up to $75-$100bn initially, taking money from the $700bn financial rescue fund, bolstered credit confidence. The public money will be used along with private capital – leveraged up to as much as $1,000bn, with the Federal Deposit Insurance Corp, the banking regulator, and the Federal Reserve, also involved in the plan.