Credit-default swaps insuring Greek government debt may pay out because a proposed bond exchange by the European Central Bankpaves the way for losses to be imposed on private investors.

Greece will introduce legislation next week that may allow so-called collective action clauses that force bondholders to accept debt writedowns, Naftemporiki reported. The ECB’s new bonds will have identical structure and nominal value to their current Greek notes, though they will be exempt from CACs, three euro-area officials said.

“The probability of triggering CDS has increased because the ECB has protected itself,” said Padhraic Garvey, head of developed-market debt at ING Groep NV in Amsterdam, who says the probability of a credit event is still low.

As much as $3.2 billion of default insurance may be trigged if the CACs are used because all investors would be bound by a majority agreement to accept a proposed debt restructuring. ECB officials previously rejected the possibility of a credit event triggering swaps, arguing it would encourage traders to bet against indebted nations and worsen the crisis.

The introduction of the clauses doesn’t in itself trigger default swaps, though using them does, according to rules of the International Swaps & Derivatives Association. David Geen, ISDA’s general counsel, declined further comment…….

The yield on the Greek 2022 bond today climbed 60 basis points to 33.98 percent, with the price at 20.825 percent of face value. The price of the 4.3 percent note due March 20 declined to 39.05 percent of face amount, from 42 yesterday.

Default swaps insuring $10 million of Greek debt for five years cost $6.8 million in advance and $100,000 annually, according to CMA. That implies an 89 percent chance the government will default in that time.

Turkish default swaps fell 10 basis points, or 0.1 percentage point, today to 256, compared with 214 for Russia and 219 for Poland, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately- negotiated market. Turkey’s credit ratings are four levels below Russia and six levels below Poland, at Ba2 from Moody’s Investors Service……..

The cost of the contracts may increase to as much as 350 basis points in the next six months should Turkey experience a “macro wobble,” Barclays’ Agarwal said. They’re likely to trade between 270 and 290 in the absence of any crisis, he said. The swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Turkish companies have a record 307 billion liras ($174 billion) of debt maturing this year just as their domestic borrowing costs rise to the highest in almost three years and HSBC Holdings Plc predicts foreign bank loans will shrink.

Companies from Citigroup Inc.’s Akbank (AKBNK) TAS to Yapi & Kredi Bankasi AS must repay an average 56 percent more local and international obligations than in 2011, according to 386 earnings statements on Bloomberg. Lira loan rates climbed to an average 15.7 percent on Feb. 3 from 8.2 percent a year ago after the currency fell the most in emerging markets last year, central bank data show. The cost of overseas loans to Turkish companies jumped to 125 basis points above the London Interbank Offered Rate yesterday from 115 on Sept. 30. The rate for Russian companies is 251 basis points, the data show.

“The cost of borrowing — for those who can borrow — has increased in both lira and dollar terms,” Okan Akin, a strategist at Royal Bank of Scotland Group Plc, said in a phone interview from London. Foreign-currency borrowers “will only be able to refinance about 85 percent of debt coming due, meaning there will be a shortfall that will need to be repaid or refinanced in the domestic market at higher rates,” he said.

While central bank Governor Erdem Basci said last month that Turkey is a “sound country” where banks will want to keep providing funding, officials at Fitch Ratings and Moody’s Investors Service said businesses may be vulnerable should policy makers start lifting rates again, particularly smaller companies. Basci decided to provide funding at 5.75 percent in one-week repurchase auctions for banks on Jan. 10, reducing lending rates he varied each day from as high as 12.5 percent…….

The lira, which rose 6.9 percent against the dollar this year, weakened 0.3 percent to 1.7691 per dollar at 6:25 p.m.

The extra yield that investors demand to hold Turkey’s dollar-denominated debt rather than U.S. Treasuries retreated 11 basis points to 355.1 yesterday, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost to protect Turkish debt against non-payment for five years using credit default swaps increased one basis point today to 266, paring their decline this year to 11 basis points.

Borrowing costs in Turkey surged last year after Basci, who was appointed governor of the Central Bank of the Republic of Turkey on April 15, almost doubled average interest rates to help stem the currency’s tumble and slow inflation. Consumer price increases accelerated to 10.5 percent in January, more than twice the central bank’s medium term goal.

Basci, 45, also raised banks’ reserve requirements to as high as 16 percent of deposits from 8 percent to crimp lending growth by banks to Turkish companies that he said was feeding the record current-account deficit. The gap surged to more than 10 percent of gross domestic product last year as businesses and consumers borrowed to fund purchases of imported goods and machinery. ING Groep NV expects the deficit to fall to $72 billion this year as Turkey’s economic growth eases to 2.5 percent, the bank’s London-based economist Simon Quijano-Evans said in an e-mail…….

Domestic corporate loan rates are the highest on average since April 2009, rising a weekly 170 basis points to 15.7 percent on an annual basis in the week to Feb. 3, the latest central bank figures show. They increased to as much as 23.4 percent a year in December 2008, after the collapse of Lehman Brothers Holdings Inc. froze global credit markets.

Fiat, which also owns luxury car makers Ferrari and Maserati, is Italy’s biggest private sector employer and has a workforce of 200,000 worldwide.

The company is also important component of the industrial structure in Italy, the eurozone’s third largest economy and a major world exporter.

“We see weakening demand in Europe’s over-supplied mass vehicle market, particularly Italy’s, as likely to pressure Italy-based Fiat Spa’s profits and cash flow,” the ratings agency said in a statement.

“Concurrently, Brazil, Fiat’s strongest market, is the site of increasing competition that has eroded the company’s leading market share,” it said.

“Standard & Poor’s believes this environment will cause Fiat’s European operating performance to deteriorate in 2012,” it added.

S&P said it was therefore placing Fiat’s BB long-term corporate credit rating and BB issuer ratings on the company’s senior unsecured notes “on credit watch with negative implications.”

The agency said it had also noted “Chrysler creditor agreements that limit Fiat’s access to cash and a cross-default clause that comes into effect in one Fiat indenture based on Chrysler being consolidated.”

The announcement led to a jump of 53 basis points to 755 basis points according to Bloomberg.

From Bloomberg,

Energy Future Holdings Corp. (TXU), the Texas power company taken private in 2007 in the largest buyout in history, plans to sell $400 million of notes to partially repay intercompany debt that hedge fund Aurelius Capital Management LP has said violates the company’s credit agreement.

The Dallas-based company will sell the second-lien, senior secured notes due in 2022 in a private offering through units Energy Future Intermediate Holding Co. and EFIH Finance Inc., according to a statement today. Proceeds will be used to pay back so-called demand notes owed to its Texas Competitive Electric Holdings subsidiary, the company said in the statement. The company had $1.6 billion of such notes outstanding as of Dec. 31, the company said in a regulatory filing today.

Aurelius Capital, one of Texas Competitive’s creditors, said in a February 2011 letter to loan administrator Citigroup Inc. that the intercompany loans violated Energy Finance’s debt agreements, two people with knowledge of the matter said at the time, declining to be identified because the letter wasn’t made public……..

Credit swaps protecting against a default by Energy Future declined 0.9 percentage point to 52.7 percent upfront at 2 p.m. in New York, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $5.27 million initially and $500,000 annually to protect $10 million of the company’s debt.

According to the FT,

At one point the yield on benchmark 10-year Portuguese debt rose as much as 204 basis points to 17.26 per cent. Portuguese credit default swaps, meanwhile, rose to record levels as the market priced in about a 70 per cent chance the country would default over the next five years.

Although slightly different reported yields by the different news bureaus, the fact of the matter is that Portgual yields are rising and rising to record highs. While Portugal CDS are trading points upfront, on a equivalent spread basis, Portuguese credit default swaps are trading with spreads under 20% and imply a default probability of over 70%.

Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro currency zone, according to a New York Times analysis of the banks’ financial disclosures.

Using these swaps, along with other measures, the five banks have cut their theoretical exposure to the troubled countries by $30 billion, to $50 billion. The analysis also shows that Citigroup has the greatest percentage of its exposure potentially protected at 47 percent, while Bank of America has bought the least protection at 12 percent…….

Citigroup said it had $20.2 billion of exposure to the five stressed peripheral countries at the end of last year. The bank said it had $9.6 billion of “credit protection” on those countries, and had set aside $4.2 billion of collateral that would also offset its total exposure.

Collecting on the credit-protection swaps would mean Citigroup’s counterparties having the money in stressed times to make a full payment. John Gerspach, Citigroup’s chief financial officer, said this month that the bank was highly confident that it could collect, adding that the entities it bought protection from were “very high quality.”

Citigroup’s disclosed gross exposure to the five countries, including $7.4 billion in loans that have not actually been drawn, was $28.9 billion at the end of last year. Its net number, after credit-default swaps and collateral, was $15.1 billion. Put another way, Citigroup has “hedged” 47 percent of its disclosed exposure to the five countries.

Bank of America appears to have hedged the least, with only 12 percent of its stated $14.4 billion exposure offset with credit-default protection, according to the analysis. “We carefully manage our risk while still supporting our clients in Greece, Italy, Ireland, Portugal and Spain,” said Bank of America spokesman, Jerome F. Dubrowski.

Like other firms, Bank of America has cut its Europe exposure by aggressively selling assets and cutting back on lending since 2009, when the region’s debt began to look like a serious problem. The bank’s exposure to the five countries is down by 44 percent since 2009, said Mr. Dubrowski. Also important, the new S.E.C. disclosure request could reveal the extent to which a bank has bought credit protection from banks based in the stressed European countries.

The fear is that a bank, say, in Italy, would be unable to pay out on its swaps if the country’s government went into default. Morgan Stanley implicitly recognizes that in its European disclosures. Alone among the five banks, it broke out the amount of default protection it had bought from banks in the five peripheral countries, about $1.43 billion.