The cost of insurance against the US failing to repay its debts rose to its highest level since the financial crisis last week, as traders worried that political deadlock in Washington might lead to a default.
One-year government credit default swaps traded at 106 basis points Saturday – the most expensive they’ve been since 2008, according to a Financial Times report that cited Bloomberg data.
The price of one-year government CDSs has spiked 15 basis points in 2023 with traders spooked by the looming threat of a debt-ceiling crisis, the FT reported.
The debt ceiling is a limit on how much the government can borrow, set by Congress. The US hit its $31.4 trillion debt limit in January – and that means it could run out of money to pay its bills as soon as July if lawmakers don’t vote to raise the ceiling, according to the Congressional Budget Office.
Everything will be settled without a big problem for investors, predicts Robert Hunkeler, International Paper’s vice president of investments.
“I guess Congress and the White House will eventually finish their game of chicken, and the debt limit will be raised,” he opines. “There might be a little more drama and brinksmanship this time around, because there are more cooks in Congress than usual, and that’s saying a lot. Either way, I wouldn’t change my investments because of it.”
To Kostin and his Goldman staff, the risk that Congress fails to boost the debt limit by the deadline is “higher than at any point since 2011,” but “the team believes it’s more likely that Congress will raise the debt limit before the Treasury is forced to delay scheduled payments.”
If the debt ceiling is not raised in time to make those payments, in Goldman’s estimate, the economy would shrink by about $225 billion per month, or 10% of annualized gross domestic product. That’s provided that the Treasury does what policy wonks call, “prioritize,” meaning somehow continuing to pay interest on the national debt, but to stop payment on other obligations.
For Thomas Swaney, CIO for global fixed income at Northern Trust Asset Management, another credit downgrade for the government is possible.
“The practical implications of a credit downgrade are not entirely clear,” he writes in a report. “But we don’t expect a modest downgrade to result in market disruptions for Treasuries, U.S. agency debt or overnight repurchase agreements.”
Previous studies (e.g. Guiso et al. 2006, 2009) have used aggregate survey data from Eurobarometer to show that the volume of flows between pairs of countries is importantly affected by bilateral trust. A limitation of such country-level evidence is that average levels of trust are almost certainly correlated with unobserved characteristics of country pairs. To rule out confounding factors, we therefore develop a bank-specific measure of trust.
For this purpose, we model banks as hierarchies (as illustrated by Figure 1). Strategic decisions such as whether or not a bank should invest in a country are generally taken at bank headquarters. Portfolio managers working in the headquarters country or elsewhere are then responsible for implementing those decisions. Because we are concerned with investment decisions undertaken by headquarters, we focus our analysis on the extensive margin of sovereign exposures – whether or not a bank invests in the bonds of a country, as opposed to exactly how much it invests.
Given this framework, cultural stereotypes in subsidiaries can shape the soft information that subordinates transmit up the hierarchy to headquarters, where the broad parameters guiding portfolio investment decisions are set. They can affect how that soft information is received by directors, because the latter share the same stereotypes, reflecting the extent to which banks hire and promote internally across borders, such that the composition of bank boards and officers reflects the geography of the bank’s branch network. We provide empirical support for this framework by showing that multinational branch networks help predict the national composition of high-level managerial teams at bank headquarters.
Interest rates cycle over long periods of time. The journey tends to be unpredictable, full of unexpected twists and turns. This project focuses on the impact of interest rate volatility on life insurance products. As usual, it brought up more questions than it answered. It points out the importance of stress testing for a specific block of business and the risk of relying on industry rules of thumb. Understanding the nuances of models could make the difference between safe navigation of a stressed environment and a default. Proactive and resilient practices should increase the odds of success.
Hyman Minsky had it right—stability leads to instability. We live in an era where monetary policies of central banks steer free markets in an effort to soften the business cycle. Rates have been low for over 20 years in Japan, reshaping the global economy.
The primary goal of this paper is to explore rising interest rates, but that is not possible without considering that some rates could stabilize at low levels or even decrease. Following this path, the paper will look at implications of interest rate changes for the life insurance industry, current stress testing practices, and how a risk manager can proactively prepare for an uncertain future. A paper published in 2014 focused on why rates could stay low, and some aspects of this paper are similar (e.g., description of insurance products). This paper also uses a sample model office to help practitioners look at their own exposures. It includes typical interest-sensitive insurance products and how they might perform across various scenarios, as well as a survey to establish current practices for how insurers are testing interest rate risk currently.
Author(s): Max Rudolph, Randy Jorgensen, Karen Rudolph
This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
Global sovereign debt is expected to climb by 9.5% to a record $71.6 trillion in 2022, according to a new report, while fresh borrowing is also broadly set to remain elevated.
In its second annual Sovereign Debt Index, published Wednesday, British asset manager Janus Henderson projected a 9.5% rise in global government debt, driven primarily by the U.S., Japan and China but with the vast majority of countries expected to increase borrowing.
Global government debt jumped 7.8% in 2021 to $65.4 trillion as every country assessed saw borrowing increase, while debt servicing costs dropped to a record low of $1.01 trillion, an effective interest rate of just 1.6%, the report said.
However, debt servicing costs are set to rise significantly in 2022, climbing around 14.5% on a constant-currency basis to $1.16 trillion.
Total Russian and Ukraine sovereign and corporate debt was $813.3 million at year-end 2021, representing 97% of total exposure; the remainder comprised $28.8 million in stocks (see Table 2). While life companies accounted for the majority of the bond exposure at $683.9 million (or 84% of total Russia and Ukraine bonds), property/casualty (P/C) companies accounted for almost all the Russia and Ukraine stock exposure at $28 million. About 90% of U.S. insurers’ exposure to Russia and Ukraine bonds and stocks was held by large companies, or those with more than $10 billion assets under management.
Author(s): Jennifer Johnson, Michele Wong, Jean-Baptiste Carelus
Publication Date: 14 Apr 2022
Publication Site: NAIC Capital Markets Special Reports
Most recently, the U.S. defaulted on Treasury bill payments in 1979 shortly after Congress raised the debt ceiling. According to the Congressional Research Service analysis: “In late April and early May 1979, about 4,000 Treasury checks for interest payments and for the redemption of maturing securities held by individual investors worth an estimated $122 million were not sent on time. Foregone interest due to the delays was estimated at $125,000.” The default was due to technical problems and was cured within a short period of time.
The claim that the United States has never defaulted, despite its frequent repetition, is not strictly true. Officials could make more modest and qualified claims such as “aside from a relatively minor operational snafu, the United States has not defaulted in the post-World War II era.” Such a claim lacks the power of a more sweeping generalization, but at least it’s accurate. If President Joe Biden and Treasury Secretary Janet Yellen want to seem credible, they should avoid making historic statements that are easily refuted by a small amount of Googling. If they cannot be believed about the basic reality of the federal government’s credit history, how can we believe what they say about current policy choices?
The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.
Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.
Since the 1990s, Italian leaders have tried to overhaul the sclerotic economy while also running tight budgets. Mr. Draghi is the first in decades who can deploy massive fiscal firepower to help.
Italy’s economy has rarely grown by more than 1% annually over the past quarter-century. The economy has never fully recovered from the global financial crisis and subsequent eurozone crisis, and slumped by another 9% in 2020 amid the pandemic and strict lockdowns.
Germany, France and other EU countries backed the recovery fund mainly for fear that Italy and Southern Europe could get stuck in another deep economic slump that once again tests the cohesion and survival of the eurozone.
Most of Greece’s debt is in bailout loans from the rest of the eurozone, with no repayments due for many years, making another Greek debt crisis unlikely for a long time.