the markets assess a lower risk of bankruptcy for the United Kingdom than for France

The UK’s bankruptcy risk has fallen below that of France as Rishi Sunak restores the government’s financial credibility and markets drastically revalue that country’s political risk premium.

Credit default swaps measuring the likelihood of sovereign default in five years have fallen to 33.92 and are now lower than they were during the pandemic, suggesting investors will forgive the brief mini-budget storm and will treat the incoming prime minister like a new broom.

Equivalent credit default swaps for France have soared in recent days and hit 34.31 on Monday after S&P Global’s latest manufacturing and services PMI survey showed France was on the brink of recession. , with French factories already in great difficulty.

The index for the eurozone as a whole showed a sharp deterioration, falling to levels seen during the European debt crisis a decade ago. Germany suffered the worst fall and is now in a prolonged recession as the energy crisis eats away at confidence and wreaks havoc on heavy industry and manufacturing.

Swaps increased to 29 in Belgium, 66 in Spain and Portugal, 165 in Italy and 195 in Greece. All have risen in recent weeks as global financial strains escalate. Although there have been many comments suggesting that the UK now has lower sovereign credit than Italy and Greece, this is clearly not reflected in the purest market indicator available.

Although bond yields may be lower in some countries, this does not reflect credit risk. It reflects the trajectory of central bank policy and a country’s position in the financial and economic cycle. The United States has higher bond yields than most European countries due to overheating. However, its credit default swaps are lower, reflecting America’s status as an anchor in global finance.

If Mr. Sunak can maintain party cohesion and offer a few months of political calm, global investors are likely to treat the Truss episode as an aberration. They will increasingly turn their attention to other countries in difficulty or with unstable governments.

Frenchman Emmanuel Macron no longer has a parliamentary majority and must pass legislation by executive decree (article 49.3), to the growing fury of opposition parties. He faces growing labor protest and the risk of power cuts this winter.

The mini-budget storm may finally die down, just as the 2007 Northern Rock collapse was first seen as a UK-only fiasco, before Europe was hit with its own dramatic collapse a year later. Ultimately, it was the Eurozone that suffered the greatest economic damage over the next eight years. We now know that Northern Rock was just the first tremor of a global earthquake that was already building up.

Claims of hedge fund activist Guy Hands that the UK is facing an economic disaster and will need a bailout of credulity from the International Monetary Fund. The UK demanded an IMF loan in 1976 because it lacked the foreign exchange reserves needed to defend a fixed exchange rate. Books are floating around today. The Bank of England will still support the gilt market in extremis.

Mr Hands, founder of Terra Firma, said the UK would face a downward spiral unless it renegotiated Brexit terms, but as so often in UK internal political debate, he ignored the fact that the Eurozone itself is in a downward economic and industrial situation. spiral of equal gravity. This is a supposed corpse that attaches itself to another corpse. How it helps is rarely explained.

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