CDS Traders Think Depression Has Been Averted, But Are Now Worried By Huge Debts

Markit’s Gavan Nolan points out that credit default swaps bet against sovereign nations decreased, but are now starting to increase again:

Markit chart of sovereign CDS spreads

Nolan explains why:

Now that a 1930s scenario seems to have been averted, investors are now focusing on the cost of getting the US – and the world – out of recession. The stimuli planned by the US, UK and other industrialised countries are putting an enormous strain on their fiscal positions. Last week, S&P raised the prospect of the UK losing its prime AAA rating. The agency highlighted the risk of the country’s debt to GDP ratio rising beyond 100% – a level reminiscent of the more profligate members of the EU.

Attention then turned to the larger “Anglo-Saxon” economy: the US. Its debt levels are rising rapidly as automatic stabilisers and additional fiscal stimulus increases the public sector borrowing requirement. The means of funding this deficit, US Treasury auctions, was the catalyst for the widening in sovereign CDS spreads this week.

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