Monday, September 30, 2013

US CDS widens as shutdown looms

The US sovereign CDS spread has risen in the past couple days with the government shutdown becoming more real.

Source: DB

But it's not the shutdown itself that's driving the US default probability higher. It's the fact that the shutdown sets a precedent for the upcoming debt ceiling debate (see video below). US politicians are showing willingness to "play chicken" and they may do it again when it comes to the debt ceiling decision (in mid October). But unlike the shutdown, the inability to raise the debt ceiling could result in a payment default (in addition to a slew of other nasty consequences). While the probability of such an event is quite low, it's enough to widen the CDS spread.
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