The sovereign rating downgrades for Greece and Portugal are likely to push up the cost of overseas borrowing for Indian companies, albeit temporarily.
Spreads on credit default swaps, instruments to cover default risks, went up immediately after Standard & Poor’s announced the downgrades.
Investors are paying record-high rates to protect bonds issued by banks in Europe, from default relative to the rest of the market, as the region’s fiscal crisis deepens. The Markit iTraxx Financial Index of default swaps rose 18 basis points to 134.5, the highest in almost a year, according to JPMorgan Chase.
While Indian companies have seen the cost of the insurance cover declining in recent days, there may be a short-term reversal in the trend. In January and February, as the news of fiscal distress in Greece and Portugal came out, CDS spreads for domestic companies hit the highest levels of 2010. Since then, they have softened.
The increase in spreads had forced banks such as Bank of India and Bank of Baroda to put their overseas fund-raising plans on hold. While the two banks subsequently raised debt, Union Bank of India and IDBI Bank are still to tap the markets.
“The rating downgrades have made the market rough. The investor sentiment is hard and hence, the spreads have gone up. But that does not mean that Indian companies and entities would see sharp rise in cost of borrowings,” said a London-based senior official of a large Indian public sector bank.
The spreads are linked to benchmark like the yield on US treasury. With a flight to safety resulting in funds moving into dollar-denominated assets, the benchmark US treasury yields are lower, compared to those prevailing early this year. So, while spreads rise, yield softens. Hence, overall costs might not go up drastically, bankers said.
“There will be a distinction made across countries. The worry is about four countries — Greece, Portugal, Spain and Ireland — due to problems of fiscal health,” a banker said.
