With the tab for the slew of bailouts, credit lines, backstops and the like reaching into the trillions, investors are seriously considering whether the U.S. can pay for it all, as evidenced by the rising cost of credit default swaps for protection on 10-year Treasuries. Spreads on insurance against default on 10-year notes by the U.S. government hit an unheard-of high of 66.4 basis points Tuesday, according to data from CMA DataVision, Reuters is
reporting.
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CDS spreads were even higher in Western Europe, where swaps on
five-year U.K. notes broke through the 100 basis point barrier Tuesday,
hitting a record level of 106.4 basis points. Within the European
Union, spreads on five-year Italian government bonds widened to 161.5
basis points from 155 basis points on Monday, while French five-year notes
also reached a new high of 56.8 basis points.
According to the Depository Trust & Clearing Corp., the gross notional amount of swaps protecting for
U.K. debt as of Nov. 21 was $12.6 billion, while the gross notional
amount of swaps on U.S. notes was $4.3 billion. As comparison, swaps
protecting against a Russian default had a gross notional value of
$111.5 billion, and Brazil's was $150.0 billion.
As governments around the world increasingly bail out their financial
institutions and other industries in hopes of softening the blow from
the recession, they have been adding unprecedented amounts to their
balance sheets. The Federal Reserve has more than doubled its
balance sheet to $2.2 trillion to deal with the fallout since Lehman
Brothers Holdings Inc. failed in September. With the U.S. committed to two expensive wars, an economic slowdown and a raft of baby boomers looking at retirement, there are reasons to question if the country has bitten off more than it can chew.
However, the prospect of a
default on U.S. Treasury notes, considered the safest financial
instrument in the world bar none, still seems far-fetched. The chaos
that followed Russia's default in the 1990s would be a picnic compared
with the earthquake and global meltdown that a U.S. default would cause
as the value of trillions in reserves held by Japan, China and other
countries around the globe would suddenly be in doubt. Simply put, the rest of the world knows that the U.S.'s place in the financial system is too central to allow such an event to occur. -
George White
See story from Reuters
See DTCC data
