Wednesday 26 November 2008

UK CDS spreads and sovereign debt

Ambrose makes the point in the Telegraph this morning that CDS (Credit Default Swap) insurance spreads are rising to 100 bps or so on British Debt. He contends that this may be due to the large dollar debt positions held by UK banks and the implicit risk of the banks (and therefore the dollar debt) joining the National coffers if the current knashing and grinding of teeth from Downing street doesn't bear fruit.

I disagree with him on this point. There is a good case to make that the dollar has topped for the moment, and - specifically - during the period he refers to the pound has recovered a couple of percent. This makes the dollar debt positions smaller and consequently less of a risk.

Right now the short term / medium sterm gilt supply and demand position is far from clear (just as it is in the US). Various currency movements and the flight to safety are generating conflicting signals if you consider gilt prices alone. The rising CDS spread may yet be the 'purest' signal the market is sending us of the deteriation in Britain's credit following this weeks revelations.

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