Chances of a US Debt Default?
Posted By Rob Millard - 1 Comments -
Thanks to credit derivatives (financial contracts that allow investors to speculate on / protect against default) we can observe how likely global markets think that it is that the United States will default on its mounting debts. Last week, markets pegged the probability of such a U.S. default within the next 10 years at 17 to 1 (6%.) A year ago, it pegged the probability at 100 to 1 (1%.)
On the other hand, according to Bloomberg, the TED Spread is back below 1%. This indicates that inter-bank trust is returning to "normal." Of course, with banks looking at least partially to manage their leverage according to the levels of debt that expect to be carrying later in the year with more customers in default, rather than the levels that exist today, the de-leveraging will most likely continue. So bottlenecks in the credit supply will not necessarily fall away anytime soon. They may ease, though.
Hat tip to Greg Mankiw at Greg Mankiw's Blog (bylined "Random Observations for Students of Economics.")
http://www.robmillard.com/admin/trackback/105132
While I follow the CDS tea-leaves with interest, I do question whether we unjustifiably ascribe to "the market" the ability accurately predict things.
On the plus side, election markets (like the IEM: http://www.biz.uiowa.edu/iem/ ) have show that, when people buy "stock" in political candidates with real money, their bets can be more accurate than political polls.
As a negative example, crude oil futures markets have consistently shown no ability to predict major price movements. Actually, they have shown a negative ability to do so, which does provide some information...
Either way, it's an interesting issue to follow.
