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U K's Tripe A Is Safe Say City Dealers, Invesco & Pimco Must Be Wrong


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Even if the AAA status is lost it may not have the effect many on these boards think.

Rating agencies have cut and cut Japan's status, but it has no problem attracting buyers for its debt.

Japan's credit rating according to the 'expert' ratings agency, was, at one point lower than Botswana's.

Can anyone tell me how default by the British Government on sovereign debt issued in Pounds Sterling would work???

Of course, agencies were at the forefront of warning about Icelandic banks and should therefore be trusted not to have a VI in anything as important as sovereign debt........... <_<

i've said similar in previous threads. Japan is an example of how their world didn't come crashing down despite the loss of the credit rating.

Which goes back to the very first quote i referenced on this thread, the one about the lefties reckoning rating agencies only applied to banks

not sovereign nations. ;)

Ofcourse a truly leftie would probably ramp the deficit up to 20%, and say to hell with cutting it within four years.......to test that little theory out. ;)

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noel,

i've read it one or two other threads about investors buying insurance, or the stories were something along the

lines of the premiums on the risk of UK sovereign debt defualt [these were CDS i think] rising because of worries

about the state of public finances and what have you.......if there is no risk of default, why is such risk insurance

bought and traded as far as the UK, a sovereign govt. with own currency?

I know i'm straying a little into your bread and butter here. So apologies for sounding like a clothead when i talk

about this stuff. But i'd be interested to hear your views on this.

"if there is no risk of default, why is such risk insurance

bought and traded as far as the UK, a sovereign govt. with own currency?"

Let me get some views from a few people and post back tomorrow

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Of course it can. At the point it can't pay, the government has two choices: print money to pay with or just stop paying. Agreed all past precedents suggest it'll do the former, but the latter is possible albeit unlikely.

Exactly - they keep printing

I wrote about the downgrade a year back when it was being talked about then

http://www.noelwatson.com/blog/PermaLink,guid,780a34e6-6974-4570-b9c7-450bc5c64661.aspx

Spain (5Y) is currently ~104bps, UK 76bps

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Exactly - they keep printing

But only because that's the easiest option - the not pay or reschedule options are also there. It's unlikely, but not impossible, that the UK government could choose to default rather than inflate. The one example of them doing this being the first world war 'war loans' they extracted from the landed nobility and then restructured as perpetual notes with a lower rate of interest than the original coupon. I'm not arguing that the most likely outcome is that they'll run the printing presses, but it's incorrect to say it's the only possible outcome.

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Agreed - see my link - happened in 1932, but I'm not sure what currency loans were denominated in.

Sterling.

edit:add:

http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts

With the exception of 3½% War Loan (which has £1.9 billion in issue) all undated gilts are “rumps”.

Back in 1932, £1.9B was a shed-load of money.

Edited by tbatst2000
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Just thinking out loud. Having virtually nationalised some of the world's largest banks with many trillions of assets and liabilities, the UK is in an unusual position. If they are forced to fully nationalise, many of those liabilities will not be sterling denominated.

If the non-sterling assets crash "Prechter-style" then the UK might end up with massive, fixed non-sterling liabilities that it cannot print to satisfy.

(Of course, at that point it can still cut the banks loose, and say to heck with everyone's savings - it was just a political promise and has been reversed, and still print to satisfy the likely simultaneous gilt crash.)

Interesting point... You have to assume that there are foreign currency denominated assets (e.g. loans) too along with stuff that isn't exactly denominated at all (e.g. real estate, any physical commodities, FX derivatives used for hedging, random other derivatives and so on). In true extremis though, I'd assume they'd go for the 'cover UK depositors, bugg3r the rest of them' approach pretty much like Iceland did.

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Just thinking out loud. Having virtually nationalised some of the world's largest banks with many trillions of assets and liabilities, the UK is in an unusual position. If they are forced to fully nationalise, many of those liabilities will not be sterling denominated.

If the non-sterling assets crash "Prechter-style" then the UK might end up with massive, fixed non-sterling liabilities that it cannot print to satisfy.

(Of course, at that point it can still cut the banks loose, and say to heck with everyone's savings - it was just a political promise and has been reversed, and still print to satisfy the likely simultaneous gilt crash.)

I'm not sure if the UK failed to pay on the non sterling liabilities whether it would be classed as a default.

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But only because that's the easiest option - the not pay or reschedule options are also there. It's unlikely, but not impossible, that

the UK government could choose to default rather than inflate. The one example of them doing this being the first world war 'war

loans' they extracted from the landed nobility and then restructured as perpetual notes with a lower rate of interest than the original coupon. I'm not arguing that the most likely outcome is that they'll run the printing presses, but it's incorrect to say it's the only possible outcome.

but, is it wise to cite as a precedent events that occured under what appears to be an entirely different 'gold standard' monetary

system.

there doesn't appear to be any circumstance under which a sovereign country like the Uk would even consider defaulting on debt

denominated in it's own currency. Even if it theoritically could.

Unless it suddenly ran out of people who could tap numbers into a computer screen in order to credt private sector bank accounts.

Now that's what i call unlikely.

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but, is it wise to cite as a precedent events that occured under what appears to be an entirely different 'gold standard' monetary

system.

there doesn't appear to be any circumstance under which a sovereign country like the Uk would even consider defaulting on debt

denominated in it's own currency. Even if it theoritically could.

Unless it suddenly ran out of people who could tap numbers into a computer screen in order to credt private sector bank accounts.

Now that's what i call unlikely.

Good point re. gold standard. I think we can agree that while it is not impossible, it is extremely unlikely.

Edited by Joey Buttafueco Jr
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Thanks for all the replies so far

As far as I've read, the CDS applicable to UK debt is for the debt denominated in dollars.

I've also read that critics of CDS talk about them being unenforceable (counterparty risk being greater than default risk itself) for soveriegn debt and therefore of dubious value beyond being just for trading.

I don't follow this 100% but it makes some reasonable points, I think.

http://blogs.ebusinessware.com/2009/11/23/a-thriving-market-in-cds-for-sovereign-debt/

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According to arguably the most authoritative and comprehensive analysis of historical sovereign default (Reinhart/Rogoff "This Time Is Different", 2009), in addition to the 1932 debt consolidation the UK restructured its debt in 1749, 1822, 1834, and 1888-89.

In these episodes the debt coupon was mostly reduced by 0.5% to 1.0%.

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According to arguably the most authoritative and comprehensive analysis of historical sovereign default (Reinhart/Rogoff "This Time Is Different", 2009), in addition to the 1932 debt consolidation the UK restructured its debt in 1749, 1822, 1834, and 1888-89.

In these episodes the debt coupon was mostly reduced by 0.5% to 1.0%.

Can you expand on what exactly "restructured its debt" is a euphemism for?

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Thanks for all the replies so far

As far as I've read, the CDS applicable to UK debt is for the debt denominated in dollars.

I've also read that critics of CDS talk about them being unenforceable (counterparty risk being greater than default risk itself) for soveriegn debt and therefore of dubious value beyond being just for trading.

I don't follow this 100% but it makes some reasonable points, I think.

http://blogs.ebusinessware.com/2009/11/23/a-thriving-market-in-cds-for-sovereign-debt/

thanks for that. i found this an interesting angle on things, perhaps goes back to what durch was saying about countries like the UK being

in an usual position with so much state involement in the big banks....

So, even if it is at a minute level, aren’t banks betting against themselves when they sell a CDS on sovereign default? (I can hear the boos,

screams and hisses).

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Can you expand on what exactly "restructured its debt" is a euphemism for?

Reinhart/Rogoff give no further details, but in their table of historical domestic debt defaults they do make it clear when the debt repayment period was extended in combination with a coupon reduction, and no such mention is made for the UK in the years I cited.

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thanks for that. i found this an interesting angle on things, perhaps goes back to what durch was saying about countries like the UK being

in an usual position with so much state involement in the big banks....

I don't think someone would buy CDS protection on UK from RBS if that is what you are saying.

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As far as I've read, the CDS applicable to UK debt is for the debt denominated in dollars.

That doesn't sound right, I'm fairly sure that the UK has never issued debt in anything other than GBP. Or do you mean the CDS pays out in dollars at some pre-agreed exchange rate should the insured obligation (which is in GBP) defaults? It would of make sense to structure a deal like that on the basis that, if the UK defaulted, then being paid in worthless pounds would be much compensation.

I've also read that critics of CDS talk about them being unenforceable (counterparty risk being greater than default risk itself) for soveriegn debt and therefore of dubious value beyond being just for trading.

I don't think that's true. I can easily imagine a French bank (e.g. BNP Paribas who are big CDS market makers) being in a position to pay should the UK default. Sure, RBS wouldn't, but then only a fool would do that trade for anything other than short term speculation.

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why would someone by CDS protectoin on the UK at all ?

This was the point of my first post. I don't understand the point of CDS protection for the UK. From what I've read if an important country, and more importantly, a country with the ability to issue soverign debt in a major currency like the Pound did default then it would be very difficult to unwind the counterparty risk as the banks responsible would be in turmoil for some time.

That doesn't sound right, I'm fairly sure that the UK has never issued debt in anything other than GBP. Or do you mean the CDS pays out in dollars at some pre-agreed exchange rate should the insured obligation (which is in GBP) defaults? It would of make sense to structure a deal like that on the basis that, if the UK defaulted, then being paid in worthless pounds would be much compensation.

I don't think that's true. I can easily imagine a French bank (e.g. BNP Paribas who are big CDS market makers) being in a position to pay should the UK default. Sure, RBS wouldn't, but then only a fool would do that trade for anything other than short term speculation.

On dollar debt see here: http://cassiuswrites.blogspot.com/2008/11/uk-cds-spreads-and-sovereign-debt.html

Maybe I've misunderstood here but he seems to be talking about debt denominated in dollars held by UK banks then being held by the Treasury as part of the part nationalisation. Would this be treated separate from sovereign debt - would have thought so, so I think I was wrong about that. Can't find the other article that referred to it.

About banks paying out, I think the idea is that the banks all over would be crippled by any big default and unable to pay out.

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