It sounds dotty to suggest the US is at imminent risk of default. A country that has rarely been able to borrow so cheaply, that issues debt in its own currency and has just demonstrated that it can print as much money as it likes need never miss a coupon payment.
 |
Yet in the past fortnight traders have come to the conclusion that America might breach its own constitutional clause that its debt “shall not be questioned”. According to Markit, the cost of one-year US credit default swaps, which insure against default, almost tripled in six trading days.
According to this – far from perfect – measure, the US is now more likely to default than Indonesia or Slovenia in the next 12 months.
America’s dysfunctional politics is starting to infect the markets. To blame are congressmen who, like House Speaker John Boehner, argue it would be less damaging to default than to raise the debt limit without dealing with the deficit. Traders had assumed this was political brinkmanship as usual until Mr Boehner was publicly supported by Stanley Druckenmiller, an eminent former hedge fund manager. He told the Wall Street Journal earlier this month that a few days of missed payments would be worth it to force the White House to accept cuts.
If you enjoy the content at iBankCoin, please follow us on Twitter
If the CDS spreads continue to widen it is only a matter of time before rates start heading up as well.
i wonder if Japan faced this scenario? …their rates have been in the gutter for ever no ?
but of course this occurred, for Japan, during a global credit boom.