Risk Premium

Via Daniel Drezner, a bit of bad news:

The price of credit default swaps on five-year US government debt hit a record 18 basis points in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt.

Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries. Traders said the CDS market for US debt was illiquid and it was hard to see evidence of increased concern over US creditworthiness in broader market prices.

Niall Ferguson once noted that Imperial Germany’s financial problems, including its inability to borrow on the most favorable terms, fed the risk-taking that prompted it to launch World War I as a preemptive measure against the Russians.

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