The cost of insuring western European government debt against default is converging with that of emerging markets. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 countries, including Germany and Ireland, climbed this month to within 18.25 basis points of a similar gauge for emerging-market risk, the closest ever, according to CMA. The spread was 160 basis points as recently as February. “Emerging markets have better fundamentals and growth prospects,” said Luke Spajic, the London-based head of European credit portfolio management at Pacific Investment Management Co., which runs the world’s biggest bond fund. “I’m a buyer of the idea.” Junk-rated Turkey, Kazakhstan and Ukraine are navigating the crisis better than developed European countries because they have less debt and avoided the plunge in real-estate prices that plagued the West. The cost of bond insurance for nations from Greece to France rose 14 percent this month as Ireland faced an international bailout to prevent contagion in the euro region. Markit Group Ltd.’s iTraxx SovX CEEMEA Index of emerging- market default swaps fell 6.5 percent to 203 basis points since it started trading on Jan. 20, CMA prices show. That means it costs $203,000 a year to insure $10 million of bonds for five years. The Markit iTraxx SovX Western Europe Index doubled to 166 basis points in the same period. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. ‘Trade at Parity’ “There’s a good chance the indexes will trade at parity,” said Greg Venizelos, a London-based credit strategist at BNP Paribas SA, Europe’s largest bank by assets. “Most of the countries in CEEMEA, like Turkey and Russia, are in better shape than Spain or Ireland, or Greece or Portugal.” Europe’s developing nations are forecast by the International Monetary Fund to grow 3.7 percent this year and 3.1 percent in 2011, compared with 1.7 percent and 1.6 percent for the region’s more advanced economies. A 1 percentage-point reallocation of the equity and bond holdings of so-called real-money investors such as insurers and pension funds from the G-4 countries to developing nations would equal an exodus of $485 billion, according to the IMF. Emerging-Market Stocks The MSCI Emerging Markets Index of stocks rose 13 percent this year, compared with the 7 percent increase of Europe’s Dow Jones Stoxx 600 Index and the 8 percent gain of the Standard & Poor’s 500 Index in the U.S. Comparing emerging markets with Europe’s developed nations is “unfair,” said Gabriel Sterne, an economist at brokerage Exotix Holdings Ltd. in London. “Unfair on the emerging countries.” Government bonds also show how investors perceive that the risk of western Europe and emerging markets have moved closer together since the European Union led a rescue of Greece in May. Turkey has 750 million euros ($1.03 billion) of 5 percent bonds due in 2016 rated at a junk Ba2 by Moody’s Investors Service and an equivalent BB by Standard & Poor’s. The notes yield 3.76 percent, about half that of Ireland’s 4.6 percent 2016 bonds, which are rated as much as nine steps higher, and close to where those securities were trading as recently as March. Turkey Growth Turkey’s economy expanded at an annual rate of 10.3 percent in the second quarter, driven by a consumer boom helped by record-low interest rates. The nation is matching China with the fastest growth among the Group of 20 major economies just two years after it exited an IMF funding program of its own. Ireland became the second euro-region country to apply for international aid when Finance Minister Brian Lenihan said yesterday that the country will seek less than 100 billion euros from the European Union and IMF. Credit-default swaps tied to Irish government bonds dropped 28.5 basis points today to 478.5, CMA prices show. Ghana’s $750 million of 8.5 percent notes due 2017, rated B by S&P, yield 5.93 percent, less than the 6.3 percent rate for Portugal’s $6.1 billion of 4.35 percent bonds, graded A-. Albania’s 300 million euros of 7.5 percent 2015 bonds, rated B+, yield about 8.4 percent, close to Irish debt. “At that point, an investor might decide it may be better to buy Polish bonds than Portuguese debt,” said Christian Keller, an analyst at Barclays Capital in London. Five-year bonds issued by Greece, which has the highest speculative-grade rating at S&P, yield 12.3 percent, about 3 percentage points more than Albania or Jamaica, which are rated at least three steps lower. The $500 million of 7.125 percent bonds due 2016 of nuclear-armed Pakistan, battling an Islamic insurgency and rated B-, yield 8.67 percent. Sharing the Pain Credit-default swaps on western European government debt and bond yields soared after German Chancellor Angela Merkel called Oct. 29 for bondholders to bear more of the cost to bail out nations that have to restructure their debt. She repeated the remarks Nov. 11 in Seoul at the G-20 summit, sending yields on Ireland’s benchmark 10-year bond to a record 8.9 percent. “This whole thing has been so incredibly badly handled it doesn’t bear thinking about,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “Sovereigns are reliant on the bond market, so saying to bondholders they’re going to take some pain is self-fulfilling. It was an irresponsible, ridiculous thing to do.” To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net; Abigail Moses in London at Amoses5@bloomberg.net To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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