Friday, December 11, 2009

Cost of Insuring British Govt Debt Rises by 1000% in 2 Years

Irwin Steltzer has a chilling article in this week's Spectator, which shows just how much confidence has been lost in Britain's ability to repay its debt.
The Wall Street Journal reports that two years ago it cost $5,000 per year to insure $10 million of British government debt against default for three years. It now costs $52,000 to buy such insurance — and $72,000 to cover that risk for five years. That is $30,000 more than it costs to insure BP’s debt, and $50,000 more than to insure Germany’s. So the markets think it is more likely that UK plc will default than BP plc. Or McDonald’s. Or Gap.

That means the markets think Britain is three times more likely to default on its debt than Germany. And the cost of insuring our debt has risen by 1000% in two years. At least we're leading Europe on one measure...

13 comments:

www.rockenergy.co.uk said...

I wonder which insurance company is stupid enough to insure any of the debts, Uk's or Germany's or x's?
To me it seems a rather safe bet to expect one collapse be joined by the others stante pede!
caw

William said...

I think this is correct.
Not neccessarily because of the large amount of public debt, off balance sheet liabilities etc. There is another angle. If Salmond is able to get a referendum on independence, and if scotland were to go it alone, what would happen to the scottish portion of UK national debt? Presumably England & Wales wouldn't take on all UK debt- there would have to be some division of the UK debt, maybe with Scotland taking 10% of UK debt as Scottish national debt. What then would the probablility of Salmond defaulting on that debt? And would this be a Credit Default Swap default event? I would think so.
I would say that it is entirely rational to think the UK is more likely to default than McDonalds or BP, but maybe for totally different reasons.

FireForce said...

Socialism, don't you just love it?

Blackacre said...

To me this shows the nonsense of these products. Whilst not denying the worrying amount of debt, of course the UK is less likely to default than even these first class companies. It can ultimately raise tax to do that (which an IMF intervention would need). So, being worse than Germany is expected and sensible, but worse than any company is ridiculous.

This is where we went wrong on sub-prime with idiots managing to given them a sovereign rating.

Bardirect said...

Next we will learn that these insurance policies are reinsured with either the icelandic government or the British government or both.

Alex said...

"That means the markets think Britain is three times more likely to default on its debt than Germany."

Strictly speaking that isn't the "risk of default" but the expectation of loss that is reflected in the price. The markets may be figuring that in addition to the likelihood of a failure to pay, the current British government is more likely to screw giltholders in the way they screwed Lloyds shareholders, if they do default, whereas the German will probably play by the rules.

JoeF said...

Re Blackacre comments- actually Governments can and do default ahead of companies- for example in 80s most Latin American govts defaulted but many larger Lat Am companies did not. This applied in particular to companies which have ability to pay from many countries (eg BP), as well as low debt levels.

Also re Alex comments, quite right- the risk includes risk of being inflated away (Government will NOT tax to balance budget, but might print huge amounts of money and keep interest rates low, so effectively bondholders lode money)

Paul Halsall said...

The thing is, Insurance companies like AIG proved completely unable to pay out on debt without state support. With any luck we will one day develop intelligent computer programs which can sort this out (without turning into Skynet!)

Demetrius said...

If this holds and continues this is bad news that will be reflected in other market movements. If the government carry on borrowing its own bail out money the situation will only worsen.

rob's uncle said...

The increase [47k] is actually 940 % of the old price [5k] or, if you prefer, 900 % to 1 significant figure.

Evan Price said...

I seem to remember that the UK has not defaulted on its debt ever ... the last time the English Crown defaulted with at the time of Charles II in the 17th Century (before the Union) ... and that the UK has the only Government in the Western World that has not defaulted on its debt.

ILLIBERAL DEMOCRATS said...

Indeed and it looks like Nick Clegg has painted Gordon into a corner over who he will do post election deals with. An interesting idea abit like the smoke idea the vatican uses yet Gordon will be pleased:

http://tinyurl.com/y8bjlrb

tapestry said...

the debts of international banks are said to be so vast that no one knows how big they are.

as brown has taken over two of them, britain's debts might be up to five times gdp.

the government's own spending is a fraction of the main problem - financial derivatives run out of control.

LINK HERE

watched by 1 million so far. from american blog www.infowars.com

worth a viewing.