US, many European govt CDS jump to new highs
Five-year CDS on UK government debt jumped 7 basis points to a record 106.4 basis points while the 10-year U.S. Treasury CDS hit a record 66.4 basis points, up two basis points on the day, credit data company CMA DataVision said.
That means it costs 106,400 pounds per year to insure 10 million of UK government bonds against default and $66,400 per year against the United States defaulting on its 10-year debt.
This really is pretty bizarre. Once again…
UK government debt is denominated in pounds. As in British pounds. How could Great Britain possibly fail to repay debt denominated in its own currency? That presupposes a level of independence for the Bank of England that really seems quite unlikely.
Aside: If anybody can point me to a free source for tracking these CDS prices, I would be much obliged. Culling the occasional Reuters article is becoming tiresome. Maybe I should get a real Bloomberg feed…
The move was most severe in Greek, Irish and Italian CDS, with 5-year Irish CDS having blown out almost seven-fold to 213.4 basis points on Tuesday compared with levels seen mid-September when the global financial crisis reached new depths with the collapse of Lehman Brothers.
See, at least that makes some kind of sense. Ireland’s debt is denominated in Euros, and the European Central Bank is quite independent of Ireland. (Because it’s controlled by Germans.) So if Ireland were ever unable to repay her debt without devaluation of the Euro, the ECB might well tell her to stuff it.
It is hard to imagine — for me, anyway — the Bank of England being similarly blithe with Parliament, or the Federal Reserve with Congress. These national central banks got their independence from the stroke of a pen and they could lose it just as easily.
And yet…Â The credit default swaps are saying sovereign default by the U.S. or U.K. is a serious possibility.
More likely is that something else is happening here. I have no idea what.
I have no idea what I am talking about but I wonder if the CDS prices simply reflect demand, and that demand is mandated by law whether or not it makes any economic sense. For example, in Germany (and likely other countries) some pension plans are required by law to pay back at least what they started with plus something. It can be conjectured that one way to guarantee that while also buying stock indexes is to buy insurance on those indexes, which may lead to the purchase of puts on these indexes from none other than Berkshire Hathaway (the last company on the planet standing). I wonder if a similar requirement is leading to the purchase of CDS on obviously solvent issuers.