One of our readers is clearly upset. I’ve just been sent a diatribe against the (Tory) claim that it is cheaper to insure the debt of McDonalds than Britain. Here’s the sanitised version:
I’ve been gnashing my teeth over one oft-repeated claim because it’s made me repeatedly angry – and sadly won’t die. I refer to the moronic argument (pushed by George Osborne) that McDonald’s has a better credit rating than the UK government. It is now repeated endlessly by Guido Fawkes and Fraser Nelson.
The UK has a higher CDS spread than McDonald’s – true. 160 for the UK vs 55 for McDonalds at 5 years. Then again, the US government is at 90 points. This shouldn’t survive a knock test.
- McDonald’s latest bond issuance was only rated at A by Fitch and the latest McDonald’s bond issuance traded at 270 bp over US treasuries, it doesn’t suggest these prices reflect real expectations of risk.
- It’s also not clear how these CDSs would pay out unless the UK or US opted into an Ecuador-style default. We can print our own money, lots of taxable capacity and – in any case – have a load of ways to renege on previous commitments which would not trigger CDSs (cutting pensions or infrastructure spending, for example).
- Finally, would the bond insurers survive a UK or US default? Would they actually offer any protection
It’s not really clear why they exist at all. There’s a neat Alphaville post on it. Bah.