Sunday, 15 May 2016

Nobody move or your country's credit rating gets it!

Left in the comments by PaulC156, from The Telegraph:

If the International Monetary Fund and its co-conspirators in the Treasury wish to deter undecided voters from flirting with Brexit, they have certainly failed in my case...

The Fund gives the game away in point 8 of its Article IV conclusion on the UK economy. It states that “the cost of insuring against a UK sovereign default has doubled (albeit from a low level)”. Any normal person who does not follow the derivatives markets would interpret this as a grim warning from global investors.

Yes, the price of credit default swaps on 5-year UK debt – the proxy we all use - has jumped from 17 to 37 since late last year. But the IMF neglected to mention that it has risen from 15 to 33 in Switzerland, from 26 to 43 in France, and from 45 to 65 in Korea.

The jump has almost nothing to do with Brexit, and the IMF knows this perfectly well. The French have an expression that will be familiar to the IMF’s Christine Lagarde: ils font feu de tout bois [they are firing on all cylinders].

'Nuff said.


Lola said...

IMHO the effect on the UK credit rating will be precisely the reverse. Once we have got out of all the EU Euro contingent liabilities we'll become an even safer credit risk.

Bayard said...

I'm still waiting for the "Brexit will lead to increased Global Warming" article, for the final casting off of any semblance of reality, or have I missed it?

Mark Wadsworth said...

L, we could argue this either way, it is largely irrelevant and would have no measurable impact.

B, keep up at the back!

Random said...

It's a load of bullshit because once the UK government is free from Article 123 in can just run unlimited overdrafts at the Ways and Means Account at the Bank of England. It can pay off all debt due with 0% interest bearer bonds :)

At the moment we can only run unlimited overdrafts intraday:

"17. Government bank accounts at the Bank of England are linked together in a system known as the Exchequer Pyramid, to ensure that any cash balances that remain at the end of each day are channelled into the main central government accounts to reduce the government's cash borrowing needs to a minimum. If the Consolidated Fund has a surplus at the end of the daily operation this is automatically transferred to the NLF to reduce its borrowing needs. If, on the other hand, the Consolidated Fund is in deficit, for example through outflows on the day being greater than taxation receipts, this is automatically financed by a transfer from the NLF. The NLF will then borrow overnight any remaining cash deposits held in any government accounts at the Bank of England (including the accounts held by government departments at the OPG). The overall effect of this will be a net Exchequer Pyramid surplus or deficit in the NLF.

18. The net surplus or deficit in the NLF is automatically balanced to zero each day by a transfer to or from the Debt Management Account operated by the Debt Management Office (DMO). The DMO's cash management objective is each day to balance this remaining position on the NLF. It does this by issuing Treasury Bills and by borrowing or lending in the sterling money market during the day. To achieve this objective the DMO needs reliable forecasts of each day's significant cash flows into and out of central government, and up to date monitoring information on actual cash flows as they occur. For cash management purposes the flows that matter are those which cross the boundary between the Exchequer Pyramid accounts at the Bank of England and accounts elsewhere (ie cross the outer black line of the chart annexed to this memorandum).

19. When government is a net lender on a particular day because, for instance, tax receipts exceed spending, the DMO lends the cash back out into the market. The effect is to balance up cash holdings across the banking sector because, if government has received more cash on the day than it has spent, the commercial banking sector will have an equal and opposite deficit.

20. The DMO has put arrangements in place with the Bank of England and the main settlement banks to ensure that its position is balanced at the end of each day, even when there have been very late changes in the forecast of government cash flows on the day. The DMO also maintains a small (£200 million) balance at the Bank which acts as a buffer, eg in the event of a change in the net government position following the final reconciliation of the government accounts in the Exchequer Pyramid after the end of each day."

Defund the IMF!

Mark Wadsworth said...

R, it's al smoke and mirrors.

Do you genuinely not realise that the UK, like many governments, has been running an "unlimited overdraft" for decades? That's what accumulated public sector debt is,

Lola said...

MW Oh I agree about the 'no measure impact', in the real world.

mombers said...

CDS instruments on local currency developed world government debt have always flummoxed me. The First world countries outside the eurozone will never default - they can just print money, right? It sounds suspiciously like CDSes are just a way to allow banks to reap juicy fees. Anyway, if the UK or US ever defaulted, it would be such a catastrophic event that there's not a chance that any CDS issuer would be able to pay out. What an awesome way to make money, you take in £millions, have a cloud cuckoo land liability on your books for 5 years, then keep it.
Corporate debt has a use for CDS sure as the insurance can realistically be paid out and the chance of default is a lot higher. Perversely, another argument for them is that corporate bonds are much more illiquid so it's a way to get exposure. Which of course removes liquidity from the market. And if you want to take a short view, you can always sell a bond short. There are options and futures as well, these seem to slightly increase liquidity according to the Google

H said...

A better translation might be 'it's all grist to the mill'.

Mark Wadsworth said...

M, I too am baffled, the insurers are never going to pay out. It's like insuring against earth being destroyed by a meteorite.

H, that's another translation.