US Government Debt Different - Finance Department - University of ...

78 A Market for End-of-the-World Insurance? Credit Default Swaps on US Government DebtTable 1: Government-Debt CDS Market DataSources: Depository Trust & Clearing Corporation (DTCC), Eurostat, BloombergThe earlier discussion of the private functions of government-debtCDS suggests a few reasons why the US coverage ratio is lower thanthe ratios for Greece and for other higher-risk sovereign borrowers.CDS on USA serves no regulatory capital function since US Treasurydebt is highly rated. And the low yields on US Treasury debt suggestthat CDS on USA does not have an important role as an investmenthedge either.What is remarkable about the US coverage ratio is not how low itis compared to Greece’s, but how low it is compared to the ratios ofcountries whose government debt is considered safe. As Table 1 indicates,the US ratio is an order of magnitude smaller than the ratiosfor Germany and the UK. This is despite the fact that CDS prices forthose countries’ debt are comparable to the price of CDS on USA,and are themselves an order of magnitude lower than CDS prices forthe debt of sovereign Eurozone borrowers that, after Greece, are consideredriskiest: Ireland, Italy, Portugal and Spain. Thus, the low UScoverage ratio cannot be explained solely in terms of the perceivedrelative safety of US Treasury debt.End-of-the-World Insurance, Bankruptcy, and Dodd-FrankOther commentators have also observed that the market for CDS onUSA is remarkably thin in relative terms. To try to explain why, theyhave cited a factor that, in addition to those already discussed, canaffect the value of a CDS contract: the risk that the protection seller