You know we are in bad things when this question even comes up… Oh is it just me that is asking myself this? Apparently not because investors are actually putting a better chance of default on the Great Britain national bonds than on McDonald’s being unable to sell enough hamburgers to make their payments… crazy? You bet.
According to numbers from British government “The Independent”, the cost of insuring a 1 year government bond of the UK for 10 million British pounds is now of 120,000 pounds, that is about 50% more than what is needed to insure a bonds of McDonald’s and it is also more than times the cost of an insurance not even one year ago, simply amazing. Roger Brown, global head of rates research at UBS, said: “No one expects the UK to actually default, but the risk is clearly higher because of the amount of debt.”
Now sure, McDonald’s has not been hit by the downturn very severely, but something sounds wrong here or is it just me? Because of its very important problems in housing as well as in its banking system, the Brits now “enjoy” a credit midway between that of France and the Italian one.
Even the US default insurance has became more expensive in recent months as investors become nervous of the consequences of the current crisis on the US government and its ability to pay in the future.
All that being said, there is no need to panic, a lot of this is all part of the major credit crisis and the massive actions of central banks around the world are helping in some ways to create liquidity which should allow investors to regain confidence on governments such as the UK and its ability to pay.
And while it is not a trade that one of us can do (institutional investors are the main actors in the CDS market), I would certainly be up for a trade where I would buy protection on McDonald’s and sell protection on the UK government. I love hamburgers but I still trust the British government (who has never defaulted in many hundreds of years) more than I will be able to trust Ronald McDonald, no offense Ronald:)
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