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US CDS widens as shutdown looms – Sober Look

This is a syndicated repost published with the permission of Sober Look. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

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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