Wednesday, Dec 10, 2008
Gordon Brown 0-- Ronald Mcdonald 1
the independant: Britain worse credit risk than McDonald's
Britain has become a worse credit risk than McDonald's and a host of other large companies, figures produced for The Independent reveal.
The collapse in Britain's credit rating has taken place over the past two and a half months, since the Government underwrote the banking system and decided to spend its way out of recession. Investing in UK government debt is now almost twice as risky as buying McDonald's corporate bonds, according to the market in credit default swaps (CDS), which provides insurance for the buyers of such debt.
Posted by sold out @ 07:08 AM (713 views) Add Comment
14 Comments
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1. alan said...
I think most people on the site agree on the risks the government is taking.
How is it going to roll out? What snaps next?
2. jackas said...
The independent chose to leave out the quote of the day, which Bloomberg kindly passes on:
Britain risks being viewed pejoratively as a banana republic
"apart from the technical disqualification that we have a
monarch and so cannot be a Republic, and it's too cold to grow
bananas anyway," says Sean Corrigan, who helps oversee about
$8.5 billion as chief investment strategist at Diapason
Commodities Management SA in Lausanne, Switzerland.
3. Amos said...
But then the markets don't exactly have any kind of half decent record of accurately pricing risk recently.
4. paul said...
"This has taken off as the domestic financial situation has got worse and the steps taken by the fiscal and monetary authorities have become more irresponsible."
In other words, they don't trust the government not to tell the BoE to inflate away the debt, leaving creditors severely out of pocket - McDonalds can't do that but the UK might.
5. holding out said...
Both run by clowns.
Do you want fries with your gilt ?
6. David Smith's Sub Prime. . . said...
I thought that it was quite a good idea when McDonalds said they were going to run our schools and were going to offer A Levels. Perhaps they have a better pedigree?
7. goweresque said...
Wait til next year when the already terrible forecasts from the PBR are being exceeded by large margins. Then you'll really see the CDS price soar!
8. Ah-so said...
Silly - the UK's credit rating is higher than these organisations and the cost of debt lower, so the risk of default is not higher in absolute terms. Non-story, move on.
9. 51ck-6-51x said...
OK, so the cost of protecting against UK default is greater than the cost of protecting against McD default. Unfortunately the comparison is not quite as simple as all that. There are a few other things to think about here - counterparty risk for one. As an example consider buying protection against a default by ice cream manufacturer Ice Inc - would you buy that protection from another ice cream manufacturer, Lolly Corp, or from an umbrella manufacturer, Umb Plc? I'd go for Umb because it's risk of default is much less correlated to the performance of Ice Inc. The same applpys here - the performance of McD is less correlated to the performance of most CDS counterparties (banks, insurance companies, etc..) than the UK. This is why the 'arbitrage' mentioned in the last paragraph exists - (once again) it's a basis arbitrage, known as a 'credit-risk free trade', although credit risk still remains - that risk of the counterparty defaulting. Do note that many other things drive the basis for a good explanation see:
http://www.yieldcurve.com/Mktresearch/files/Choudhry_EuromoneyCDSBasisFinalJun03.pdf
and other articles on the subject by Moorad Choudhry at:
www.yieldcurve.com/Mktresearch/articles02.asp
10. matt_the_hat said...
But the UK will never 'default' - it borrows money in pounds (like the US) therefore can inflate away any problem, is this risk covered by CDS's
11. paul said...
Ah-so's writing style seems familiar - starting the sentence with a dismissal, followed by a credible but flawed economic argument, finished with a motion to discredit (based on said flawed argument).
David? David Smith? Is no-one paying you to write stuff any more?
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