German minister hints that Greece could default on its debts; a number of European insurers hold sovereign debt bonds

Fears of a Greek default on debts soared yesterday, sending bond yields on Greek debt to a new euro-era high.

Concerns mounted after German finance minister Wolfgang Schauble admitted “additional steps” would be needed if the European Central Bank concludes that Greece’s debt burden is unsustainable. 10-year bonds soared to 13% yields and two year bonds rocketed to 18%.

A number of (re)insurers, including Allianz, Aviva and Munich Re hold sovereign debt bonds in troubled countries such as Ireland, Greece, Portugal and Spain, although in relation to the size of their investment portfolio, the holdings are fairly small. It is also unclear what effect a default, if any, could have on their investments.

In August last year Amlin Corporate and seven other insurers were stress tested by Fitch over a eurozone crisis, and a Greek default, but came through the test strongly.

"Insurance companies, as substantial investors in fixed-interest securities and as businesses that rely heavily on investment returns for a large part of their profitability, can be affected by difficulties facing sovereign issuers. In recent months certain sovereigns have faced such difficulties, including Greece, Portugal, Spain, Ireland and Italy," Fitch says, in its report called European Insurers Resilient to Street Test.

“Fitch Ratings has applied a sovereign stress test to its rated portfolio of European insurers. The agency believes that all companies in this portfolio would be able to withstand an external shock derived from a hypothetical Greek sovereign default, including an assumption of ancillary stress for other key euro zone nations. The agency has therefore not taken any rating actions on its European insurance portfolio as a result of this stress test."