Research from Chaucer indicates that the cost of insuring against sovereign debt defaults has increased by 102% over the past year.
According to the firm, the twelve months has seen the cost of Credit Default Swaps used to insure against a default on the debt of a third party, such as a government, soar as the global economy has deteriorated.
Over the same time, Chaucer said that yields on government bonds have risen sharply, from 0.68% to 3.15% on UK 10-year gilts. An increase in the value of the dollar has also added to the cost of servicing that portion of emerging market Government debt that is denominated in dollars.
Jonathan Bint, senior analyst and underwriter at Chaucer, said: “What is noticeable is the demand for insurance against contract frustration in major G7 economies. Normally demand for insurance against Governments cancelling contracts is restricted to more volatile economies. Now we are seeing demand for this kind of insurance to cover contracts in countries like the UK, France, and Italy.”
He added: “Rising sovereign debt, interest rate hikes and negative economic growth make a perfect storm for the global economy and businesses could be left exposed to government contracts being cancelled without safeguards in place. Contract frustration insurance can offer protection against the risk of governments cancelling contracts, which could mean the difference between a business surviving or not.”
Chaucer says that 90.9% of the 88 countries in its study have seen the cost of Credit Default Swaps on their sovereign debt rise.
The UK has seen the cost of its Credit Default Swaps (CDS) on its sovereign debt rise by 148% over the past year. CDS, said Chaucer, rose 112% on average across Europe, 54% in the Americas, 179% in Asia & Pacific, 70% across Africa, and 1% in the Middle East.
Chaucer wrote in a statement: “Governments keen to cut expenditure can be tempted to cancel corporate contracts to reduce spending. Contract frustration insurance protects against this. While emerging economies are most likely to be most affected by governments going through radical cost cutting measures and cancelling commercial contracts, demand for contract frustration insurance against the actions of Western economies is also growing.”
It added: “In the wake of the 2007 Global Financial Crisis, outsourcing and IT contracts were cancelled by governments across developed economies. A repeat of a global recession now could affect government contracts for corporates from industries as varied as construction, infrastructure, and property.”
The firm warned that with interest rates anticipated to rise higher across developed economies with inflation still rampant, CDS may increase in value even more in the coming months.
