Credit protection madness

http://krugman.blogs.nytimes.com/2009/03/10/credit-protection-madness/

 

Paul Krugman's blog, which also happens to be the reason why i was learning and playing with real money on options trading, forex trading in 2007, only to drop everything end 2007.

 

March 10, 2009, 3:33 pm

Credit protection madness

Marketwatch reports:

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt.

The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week.

Has the risk of a US government default risen? Probably. Nonetheless, the people buying these contracts are crazy. A world in which the US government defaults would be a world in chaos; how likely is it that these contracts would be honored?

Nassim Taleb has a line about CDS in general, which certainly applies here:

It would be like buying insurance on the Titanic from someone on the Titanic.

 

Hee Teck

 

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