Is U.S. Debt Losing Creditworthiness?

In a July post, "The Beginning of the End for America's AAA Rating?" I noted that the price of a credit default swap (or CDS, a form of "insurance" on creditworthiness) on 10-year U.S. government debt had climbed to a record 21.8 basis points (one-hundredths of a percentage point).

The rise indicated that investors were becoming increasingly worried about the financial health of the United States.

After treading water in the seven weeks that followed, the cost of insuring against a U.S. debt default has again moved higher, touching a fresh record of 24 basis points on Monday before easing back a tad to 23.3 bp today.

Amid bailout after bailout, is it any wonder that investors are beginning to anticipate what was once unthinkable -- an America that is unable to pay its bills?

Comments

[reph:]

Of course the US will pay. It will just print more money to do so.

2008 Sep 16 11:54 PM

[Undecided:]

A near-term change in 10 year rates doesn't mean much to me. While my emotional response to the trillions of extra debt we've taken on recently would have me say that we hardly deserve to be AAA. But, if not us, who? I can look around the world and not see a much better picture. Sure, the Chinese have more cash on hand than anyone else, but what else is important in deciding risk premium? Economic stability, government stability, liquidity, long-term inflation, currency risk, debt levels, budget deficit, public policy works demands, a long-term track record.

2008 Sep 17 12:37 AM

[MarketWatcher:]

Investing in the US is very risky indeed because by all of Undecided's criteria the US is not panning very well... Our government might be stable, but our the decisions our government have been totally unpredictable and reckless. So yes, Treasuries might sell for a long while as the dollar is still the world's currency --this is what allows the US to print all that money... Yet if this empire ends, all of this might mark the year when the latest of many long-gone empires entered a systematic cycle of printing money and of devaluing its own currency...

2008 Sep 17 01:24 AM

[bearfund:]

MarketWatcher, this year will not mark the beginning of any such thing. That happened in 1971.

As for Treasury CDSs, it's hard to imagine anyone wanting to pay on those. If the US had to borrow in currencies it didn't control (or, heaven forbid, in gold), these would be priced in points up front like every other doomed issuer. As it is, there is zero chance of default. What you get back won't be worth much, though.

2008 Sep 17 02:13 AM

[Jason Rines...:]

The US seems to be entering a period like the British Empire did after WWII, loaded up to it's eyeballs in debt and losing the international monetary peg advantage it held for decades if not centuries. The Brits nationalized and it took Margret Thatcher to privatize it 30 years later. The USA has far more natural resources, communications and military dominance then Britain had. THE USA would do such within a five year span, but this of course depends on Washington.

Pain creates necessity and productivity. Necessity is the mother of all invention and the USA is a wonderful culture of ingenuity. We have just not seen much in the last few years as trillions of paper deals by power brokers tied into Washington squeezed out true innovation and entrepenuarial spirit.

I know this because I was trying to raise money these last couple of years. No, I did not want or need $30M-$50M in investment and dillute equity and retain a small sliver for a fat salary. I am old school, love skin in the game and all or nothing play. But if you needed less then the sums I mentioned for an early stage or start-up, forget it. The market did not want to hear it or you gave up 51% equity to an angel for even if you had a proven revenue stream and business model.

2008 Sep 17 10:36 AM

[notsosmart:]

would you loan money to the usa at this point? at what interest? also-can anyone figure out how much russia defaulted on since ww1 in current $.

2008 Sep 17 11:05 AM