Wednesday 16 January 2019

Cost of insuring against UK debt default highest since Brexit vote

British Prime Minister Theresa May makes a statement outside 10 Downing Street. Photo: Leon Neal/Getty Images
British Prime Minister Theresa May makes a statement outside 10 Downing Street. Photo: Leon Neal/Getty Images

Marc Jones and Gavin McLoughlin

News of a vote of no confidence against Britain's Prime Minister Theresa May yesterday pushed the cost of insuring UK government debt against default to its highest since the Brexit vote.

The vote lifted the price of '5-year UK Credit Default Swaps'. These products are used by traders to guard against the prospect of Britain defaulting on its debt.

The swaps are structured whereby the purchaser of the swap pays a fee for protection. The seller of the swap has to pay out if the UK defaults.

The greater the risk of a default, the higher the fee that has to be paid for the insurance. Swaps can also be used as a way to make money. They were famously used by a number of investors to bet against big US banks before the crash.

The investors bought swaps, paid the premiums, and then collected big payouts when the banks got into trouble.

The strategy was the subject of 'The Big Short' - a film based on the book of the same name by well-known US author Michael Lewis.

Ms May was yesterday trying to shore up the support of Conservative MPs as she seeks to salvage her proposed agreement for Britain's withdrawal from the EU.

Reuters

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