Wednesday, 15 April 2009

Illiquid markets

I have read variations of this statement a number of times recently:

"Prices in the credit markets, meanwhile, have suggested that Britain is about five times more likely to default on its debts than the fast-food chain McDonald’s."

(From here.)

This stat is often used to support arguments that the UK has too much debt and prices in 'the market' show this.

However, a moment's reflection should make us wonder about the stat. The UK's debts are backed by taxes paid by you and I. McDonald's, on the other hand, is a medium-sized company with mere revenues and assets; it has no armies to force people to pay it money.

The truth behind the sensationalist stat is rather more prosaic (though quite interesting to debt nerds): the credit default swap market is barely operating because of the credit crunch and few trades are being done. This means that all prices are rather anomolous and so should not be compared with each other, certainly not when they are as different as a company and a country.

However, that would not make such a good story!

1 comment:

Anonymous said...

paid by you and ME.

good points to keep in mind though.