Wall St. Bets Big on BP Default

Credit-default swaps predict 39% chance of failure
By Kevin Spak,  Newser Staff
Posted Jun 16, 2010 7:28 AM CDT
In this Oct. 25, 2007 file photo, the BP (British Petroleum) logo is seen at a gas station in Washington.   (AP Photo/Charles Dharapak, file)

(Newser) – Wall Street oddsmakers think BP has a 39% chance of defaulting on its credit in the next five years, based on the skyrocketing price of the company’s credit default swaps. A month ago, investors had priced in just a 7% risk of default. “There’s still so much uncertainty as to what ultimately the liability is, and what the government is going to do,” one researcher told Bloomberg.

You may recall credit default swaps from their starring role in the financial crisis. Basically, they’re a bet over whether a company will or won’t pay its debts. BP’s securities, meanwhile, are now paying a spread of 804 basis points—which is nearly as high as you’d expect from a company already in default. The company’s stock is down 48% since the Deepwater Horizon explosion.

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