CDS on Spanish debt at record high Credit default swaps on Spanish debt hit a record high on Monday, underscoring the level of nervousness surrounding the outlook for the eurozone's fourth-largest economy. The cost of insuring against a Spanish debt default jumped 27 basis points to 622bp, equating to annual costs of $622,000 to insure $10m of debt for five years. Italian CDS meanwhile rose sharply to 554bp, according to data provider Markit. CDS on banks including BBVA and Santander also traded wider, highlighting how closely correlated Spanish banking stocks have become to the Spanish sovereign. News of a €100bn bailout for Spain's banks failed to calm markets last week and, despite a brief market rally in the wake of Greece's election results, yields on Spain's 10-year government debt continued to rise. On Monday they hit a fresh euro-era high. As banks in the eurozone have looked to shrink and offload assets on the back of regulatory and market pressure, lenders have become increasingly closely aligned to their sovereign. Analysts point out that those links have been reinforced in so-called periphery countries by a recent €1tn-plus capital injection into the eurozone banking system by the European Central Bank. Many banks in Spain and Italy borrowed heavily from the ECB via its three-year longer-term refinancing operations, using the money to buy their own government's bonds. The Markit iTraxx Europe Senior Financials index, which looks at the CDS spreads of a basket of big financial institutions, on Monday showed that the overall cost of Europe's major banks to insure against default rose 10bp to 288bp. The CDS market is increasingly seen as a proxy to measure stresses in the eurozone market. The instruments are used by investors to protect against default or as a speculative device. CDS prices rise as investor confidence deteriorates. Saul Doctor of JPMorgan says that, when it comes to corporates: "Generally what we are seeing is that the CDS market reacts first and more vigorously than the bond market because people are not yet being forced to close bond positions . . . The CDS market is currently a lot more liquid. Analysts say the CDS market can be more indicative of sentiment than the underlying bonds, but is just one of several barometers they use, and there are distortions. Yields on German Bunds, for example, have fallen as investors have sought haven assets. However, the implied risk of default is high relative to Germany's bond market. European politicians have suggested in the past that the short selling by hedge funds of CDS linked to Greek government debt may have increased the cost of putting together a package to save Greece. However, a recent report from the International Organisation of Securities Commissions, the umbrella body for the world's market regulators, found no conclusive evidence that short selling of CDS had exacerbated problems in the Greek debt market. Regulators agreed following the 2008-09 crisis that CDS contracts, as well as other off-exchange-traded derivatives, should be centrally cleared.