Wednesday, March 11, 2009

Is the USA the next AIG?

It's a bit of stretch to make that comparison just yet, but there has been a significant shift in the little understood Credit Default Swap market as it relates to the US debt.

Credit Default Swaps are basically insurance that a buyer of debt purchases to protect their investment. The lower the risk of default, the cheaper the insurance. As concern grows about the viability of the debtor grows, the cost of the insurance grows.

Thus, this little noticed story might have some big implications for us in the future.....

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt.

The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit.

So we're a comparable credit risk to France and the cost of insuring our debt has jumped 700% in a year. I wouldn't suggest that the US is about to default on any debts, but I think it bears watching as we progress through 2009.

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JP Morgan Chase made headlines today when it was leaked that they intend to increase outsourcing to India by another 25% and spend up to $400 million on IT services in India every year. This has ruffled plenty of feathers among the protectionist crowd, but since we own a big piece of JPM, I'm happy to see them seeking out low-cost IT services.

On a related subject, I read this story in amazement - in the midst of the greatest economic contraction in probably 75 years, Infosys (an Indian software company) is hiring 20,000 new engineering students. 20,000!!! That's 20,000 new competitors banging out code on the other side of the world. Oh, and their paying 8% more this year --- starting salary $6,000/year.

Welcome, to the flat new world.....

Cheers!

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