The credit-default swap market was starting to prepare for a Parmalat credit event last week. Traders made the switch from quoting prices in basis points to charging a cents-in-the-dollar figure as DW went to press on Thursday. The move was triggered by Standard & Poor's downgrading the Italian dairy producer six notches to CC/C.
Pierre Mathieu, a trader at BNP Paribas in London, said, "Parmalat has always been a widely traded name." A trader estimated that there is roughly EUR2 billion (USD1.64 billion) of protection outstanding on Parmalat and as a frequently traded name it would have a substantial effect on the market if it defaulted. He predicted that this could be on a similar scale in terms of numbers of investors and deals to WorldCom.
The week's action was triggered when a EUR150 million Parmalat bond matured on Monday and the company called for a five-day grace period to allow it to repay the bond.
Parmalat said that it had bought back EUR110 million, but traders were left wondering how a company which had EUR3.7 billion of well-rated liquid securities listed in September could not find the outstanding EUR40 million. Laura Vergani, senior communications officer at Standard & Poor's, said "[The September data] has been proved to us to be inaccurate and it has significantly heightened the risk of default, which we have reflected in our rating."
Five-Year Credit Protection On Parmalet
