Cost of insurance against UK debt default has more than doubled over last year

The cost of insuring the UK’s debt against default has more than doubled in the past year, as rising rates, increased borrowing and a deteriorating economic environment spooked investors. 

According to exclusive data from reinsurance firm Chaucer, the cost of a credit default swap (CDS) on the UK’s debt has increased 131 per cent. 

A CDS is a financial derivative that allows an investor to swap or offset their credit risk. The price of a CDS rises when a firm is seen as less likely to pay back its debt.

Some of the increase reflects the immense damage to the UK’s economic credibility wrought by Liz Truss’s disastrous mini-budget. 

Investors are also concerned by the huge amount of borrowing in advanced economies which supported citizens through the pandemic and cost of living crisis.

In figures out earlier this year, the government revealed that higher interest rates pushed its monthly borrowing to £25.6bn in April, the second highest April figure since records began

In the US meanwhile the price of a CDS has jumped 282 per cent over the past year reflecting concerns over the banking sector and, more recently, the debt ceiling. 

Since November last year, the price of a CDS has increased by over 140 per cent. Investors will be grateful that Congress has passed a deal to lift the debt ceiling guaranteeing that the world’s largest economy will be able to pay its debts. 

Jonathan Bint, senior analyst & underwriter at Chaucer says: “The risk of default in many countries worldwide is growing at a fast pace. Even in economies as advanced as the U.S. and U.K the cost of insuring against a default is rising.” 

“While few mainstream investors expect either the UK or US to actually default that doesn’t mean that being a creditor to those Governments is without financial risk. The worsening state of public finances are particularly worrying for corporates seeking to protect themselves financially from potential cancellation of government contracts,” Bint continued. 

CDS costs have risen all around the world, with nearly three quarters of the 88 countries in Chaucer’s study seeing an increase in the cost of a CDS. The average cost of insuring against a sovereign debt default globally has risen by 67% year on year.

Some of the worst hit have been developing countries reflecting concerns that as rates rise and global economic growth slows, those countries will not be able to pay their debts. 

“The debt of developed economies has ballooned in the last few years and governments have been unable to sufficiently stimulate economic growth to sustain this increase in debt. Increases in bond yields are indicative of investors viewing advanced economies as higher-risk,” Bint said.