Has the United States ever defaulted on its debt?
Don’t look now but CDS rates for 1 year US government debt hit their highest level since the Great Financial Crisis.
U.S. hit its debt limit, and as a result; assuming continual congressional dysfunction; the odds of a sovereign debt default become something tangible. However, even if still remaining small. One consequence has become a spike in the price of credit default swaps (CDS) that pay out if the U.S. defaults.
A CDS (Credit Default Swap) for government debt is a financial instrument that allows investors to hedge against the risk of default by a government on its debt obligations.
In simple terms, a CDS is a contract between two parties!
Where one party (the buyer) pays a premium to the other party the seller. In exchange for protection against the risk of default by a particular government. If the government does default on its debt. The seller of the CDS pays the buyer the difference between the face value of the debt and the market value of the debt at the time of default.
CDS for government debt typically becomes used by investors who hold the debt of a particular government and want to protect themselves against the risk of default. It can also become used by speculators who believe that a government is at risk of default. And want to profit from the decline in the value of the debt.
In conclusion, it’s worth noting that CDS for government debt is not without controversy. Moreover, some critics argue that it contributes to instability in the financial markets. And can become used by speculators to drive up the cost of borrowing for governments. Lastly, others argue that it provides a valuable mechanism for managing risk in the global financial system.
Has the United States ever defaulted on its debt?
The price of credit default swaps to insure against a U.S. default has soared (axios.com)
