Fitch: Telco, Oil and Gas Bear Brunt of European CDS Widening

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The oil and gas and telecoms sectors have seen credit default swap (CDS) spreads widen the most in the market fall since mid March. In Fitch Ratings' opinion the former probably reflects a run of individual bad news while telecoms suffer from more deep seated problems.

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (spread) to the seller and, in exchange, receives a payoff if the loan defaults.

Fitch Solutions' index of European CDS prices has widened 15% since mid-March. The oil and gas sector has widened the most, by 29%, with telecoms out by 27%. The telecoms widening was in line with a relatively high standard deviation and more than doubling of spreads since the start of 2011, consistent with persistent problems.

The telecoms sector faces more fundamental challenges. Traditional voice revenues are in decline and the strong competition in European telecoms means that the promised boon from increased data usage may be given away in price reductions and at best only compensate for these falls. There are also growing concerns over populist regulation extending beyond historic price regulation.

There are problems in specific European markets. For example, those in southern Europe have seen falling revenues as a result of the weak economic climate. The French market is currently experiencing severe price deflation following the entry of a fourth mobile operator.

The market appears more concerned about economic threats to Europe than global growth - with contrasting fates for local European consumers and the more global customers of industrials and metals and miners. Consumer goods and services widened more than average, whereas the most resilient sectors were pharmaceuticals, basic materials and industrials.

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