Thinking the Unthinkable: U.S. Default

Hard not to think the unthinkable in the wake of recent events. Specifically, what is the likelihood of the U.S. defaulting on its debt? Admittedly, it would never be because of this one episode — it would be that, plus multiple financial seismic shocks. But all of these are more likely than they were before. Default, while still wildly unlikely, is more plausible than it was a day/week/year/decade ago.

One answer (based on illiquid data):

The price of credit default swaps on five-year US government debt rose to a record 17.5 basis points in early trading, according to CMA Datavision. This means that it now costs $17,500 a year to buy insurance on $10m of US government debt.

Although the market for such insurance is relatively illiquid, the price suggests the market believes the US government is more likely to default on its obligations than some other industrialised countries. “The USA is now ‘riskier’ than Norway, Germany, Netherlands, Sweden, Finland, Austria, France, Denmark, Quebec and Japan,” said Tim Backshall, chief strategist at Credit Derivatives Research.

[via FT]

Related posts:

  1. Figuring Out the Impact of Default Likelihood on Default
  2. Figuring Out the Impact of Default Likelihood on Default
  3. It’s Not the Bond Rating Agencies’ Fault
  4. Contrarian Thinking on Buyouts and VC
  5. Warren Buffett and the Case for Eliminating Municipal Bond Insurance