Cost of insuring against US default now at record high
CMA sources credit prices directly from the world’s largest and most active credit investors. Data from CMA show that the US leads the list amongst sovereign credit default swap wideners today.
The number for insuring is still relatively low compared to the lower credit countries with the highest default probabilities. Nevertheless, the evidence that the debt ceiling debate is increasing costs for the US economy is increasing.
Yesterday, I noted that Treasuries had lost their risk-free status as collateral at CME. Separately, JPMorgan Chase estimated the cost of a credit downgrade at $100 billion. A survey of 53 economists showed 30 believed that one of the leading ratings agencies will downgrade US sovereign debt ratings. See All S&P sovereign credit ratings for July 2011 here.
The longer the stalemate in Congress continues, the greater the costs will be.
Paul Waldie of BNN in Canada discussed this issue with Ryan Avent of the Economist and me yesterday. Watch the video clips here (Part 1 and Part 2) or click on photo below.
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Note that these are 5-year CDS and that the probability of default is still very low compared to the 75% for Greece. However, the headline is the large increase and the burden this cost will be for the US economy.
Isn’t the USA truly defaulting essentially the end of the financial world – if you take out insurance for the end of the world, who pays on your policy….Martians?
No one could. If the biggest single market item defaults they could not pay. It depends on how much CDS is sold on US debt. If it matches the scales of treasury debt then there is no one who can repay. It will be payment for a policy that can never be claimed on. If the US were to default it would be totally self inflicted, and totally political.