Ambrose Evans-Pritchard



Bankruptcy update, Britain plus California

Posted By: Ambrose Evans-Pritchard at Nov 25, 2008 at 20:30:47 [General]
Posted in: Business
[ 27 comments ]

The CDS spreads on British debt jumped even higher on Tuesday, touching 100 at one stage. This is a little frightening.

I suspect it reflects fear that the liabilities of the British-based banks -- which include HSBC and Standard Chartered, with all their global exposure, as well as RBS, Barclays, Lloyds TSB, HBOS, and Northern Rock -- are disturbingly large for the size of the UK economy.

Britain has no real debt in foreign currencies. Like other AAA states, it borrows in its own currency. This is a lifesaver.

However, and here is the awful catch, some of these private banks have vast dollar positions, so as more of them fall into the hands of the British state (partially or fully) the dollar debt implicitly moves across onto the sovereign balance sheet.

This is not a subject that I have seen discussed anywhere, but it is worth pondering. What killed Iceland was the dollar/euro debts of its three big banks, not its own sovereign debt in Krona. It is the dollar liabilities of Russia's banks and companies that is now causing a run on the rouble.

Here lies the real danger of taking over all these banks so nonchalantly.

I suspect that some hedge funds have already spotted this Achilles Heel and are now testing the trade.

(Although a US hedge fund told me last weekend he was targeting the default risk in five other countries in Europe -- and the EIB -- but not British debt because he thought that the UK's role as a military power and a permanent UN Security Council member provided an extra shield, ie the global order has too much political investment in Britain to let it happen. I have no idea whether this is a good judgement, but I pass it on)

By the way, my colleague Yvette Essen showed me the CDS data on some of the US states. These are quite revealing too.

Michigan 192
California 165
Nevada 164
New Jersey 150
Ohio 104

So, California is now priced as a greater bankruptcy risk than Slovakia 150.

http://blogs.telegraph.co.uk/ambrose_ev ... california