(Now with added graph and context)
As investors scramble to protect themselves from the next credit flare-up in Europe, their worries are spreading to the U.K.
So writes the Wall Street Journal on Friday morning.
Investors bought a net $443 million of credit-default swaps to insure against a U.K. default last week, according to data compiled by the Depository Trust and Clearing Corp., taking the total outstanding to $8.2 billion. That was easily the biggest gain among sovereign borrowers. The size of protection on the U.K. has roughly doubled since the year began, a move that far outpaces the run-up in Greek CDS last fall.
Gulp.
So, does this mean the UK is the next Greece?
For some, like Terry Smith, the head of inter-dealer broker Tullett Prebon, the answer is yes.
I warned about the pending issue of the creditworthiness of governments in an article I wrote for the Sunday Telegraph in 2008. What is said then still stands: “Any country and currency is at risk which has guaranteed bank liabilities which are large in relation to its total economy.” The following post on ZeroHedge is an interesting insight into the credit markets which act as an early warning system for the wider economy: “the credit market is flashing a bright red warning light over…the UK”.
However, it’s possible to read too much into the spike rise in trading activity.
(These figures are published weekly by the Depository Trust & Clearing Corporation).
The fact the spread has remained stable (between 70-76 basis points over the last month) while business has increased suggests that there is plenty of two way business – ie, there are a lot of institutions/hedge funds/banks still prepared to write protection on UK government bonds.
From Markit:
Moreover, the UK spread remains a fraction of Spain’s and the UK CDS has been outperforming Germany and France in recent weeks, as this chart shows.
Trading volumes could also have been boosted by the general election and the possibility of a hung parliament. (And it’s interesting note after David Cameron’s ‘victory’ in Thursday’s night’s Leaders’ Debate the spread on UK CDS is 70bps, down from 75bps.)
In fairness, the WSJ picks up on this point and others:
Investors may be buying CDS simply to hedge the risk of making relatively bullish bets on the U.K.—namely, buying British debt in the belief it will outperform European debt, suggests Brian Yelvington, fixed-income strategist at Knight Capital.
But the increase in UK CDS activity is certainly worth watching even if this is nothing more than amber signal – if that.
Related link:
Britain’s very own AA-rating rumours – FT Alphaville
11 reasons why Britain isn’t the next Greece – FT Alphaville