26 November 2008

Are Governments more risky than some banks?

This is the question asked by a national newspaper today. The reason for this is the fact that the cost of insuring against the British Government defaulting on its outstanding debt during the next five years has surged to 100 basis points above Libor at one stage.
This is more than the premium charged to insure bonds issued by the stronger banks such as BNP Paribas, Commerzbank of Credit Agricole.
We do not think that a default scenario is very likely for the government debt of any major industrial nation but we think it is extremely unlikely that the money that you will be repaid with will have even close to the same purchasing power that it had when the bond was issued.
The loss in purchasing power will be the involuntary contribution made by bond investors to finance the politician's pet spending projects - especially on their clientele and hangers-on.