Protection spreads on European bank debt begin to narrow

The cost of credit protection for European banks started to contract this morning following a week of unprecedented spread widening across the sector.

Credit default swaps for major European financials have widened from between 8 basis points to over 80bp over the past week, driven by a major crisis of confidence in the sector. The situation was mainly precipitated by the recent crisis in the German banking sector and active downgrading by the rating agencies on a number of key institutions in recent weeks.

“This has put severe pressure on the system,” said one financials trader at a leading credit derivatives dealer in London today. On the