How the markets rate the solvency of American states compared with European countries

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Credit default swaps are derivatives that investors use to protect against, or bet on, an entity being unable to repay its debts. The higher the spread, the less faith the market has that default can be avoided. As fears over the fiscal health of peripheral euro-zone countries have resurfaced, their spreads have climbed dramatically. Those of larger members have also widened, but by less. America's federal and state governments, by contrast, are by and large seen as much safer than they were at the start of 2009, though spreads has crept up this year amid growing worries about chronic pension and health-care shortfalls. The state with the biggest budget problems, California, is seen as slightly less likely to default than Spain but slightly more so than Italy.

Source: http://www.economist.com/blogs/dailychart/2010/11/credit-default-swaps_spreads?fsrc=scn/fb/wl/dc/greek

[mawilson 2,133]

In other words, we stink less.

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In other words, we stink less.

We stink less than they do and we stink less than we used to almost two years ago. They, on the other hand, stink more than they did at that time. It would seem all the reports of the demise of the U.S. were exaggerated - if anything, Europe appears headed in that direction.

[mawilson 2,133]

We stink less than they do and we stink less than we used to almost two years ago.

Well these things can change rather quickly. Look at Portugal two years ago -

almost the same level as the US - and look at them now. Being the world's reserve

currency helps, but won't save us if we keep doing stupid things.

[scandal 951]

We stink less than they do and we stink less than we used to almost two years ago. They, on the other hand, stink more than they did at that time. It would seem all the reports of the demise of the U.S. were exaggerated - if anything, Europe appears headed in that direction.

You need to distinguish between debt of US states, and the US federal debt. As your chart above does.

Some states - CA, IL in particular - are in seriously bad shape with structural deficits that predate the recession. These also happen to be states with hopeless political gridlock in their legislatures and no prospect of balancing their revenues and spending. In IL we just reelected Gov Pat Quinn (D) who is insisting on the need for a tax increase, yet the state GOP shows no sign of backing down on its opposition. IL risk of default is in line with PIIGS and pretty scary.

On the federal level you are right that (current) predictions of imminent catastrophe are overblown. But look down the road to our entitlements spending. Unless we restructure Social Security and Medicare we will wind up with unsustainable deficits that will put us into junk category. Note that your chart is looking at 5 year CDS - that's because we don't have a liquidity crisis within 5 years. Our crisis is further out. Do you have a chart for 30 year CDS spreads on Treasuries? I expect those would look somewhat worse. They still won't be horrible since the credit markets ultimately expect we'll get our house in order withn the next few decades. But given the hostile reception given to the recent Simpson Bowles commission, don't count on it.

[Mr. Big Dog 10,747]

It would seem all the reports of the demise of the U.S. were exaggerated - if anything, Europe appears headed in that direction.

Not really. The death of the EUR has been discussed when Greece needed financial assistance. And now there's Ireland. Next in line Portugal and potentially Spain and Italy. That's potentially. Now, Greece, Ireland and Portugal are in trouble. These three represent roughly 7% of the EUR zone economy. That's less than the share NY state has on the US economy. Question then is, would the dollar collapse if NY state went insolvent?

[mawilson 2,133]

Question then is, would the dollar collapse if NY state went insolvent?

100%

[Mr. Big Dog 10,747]

100%

California was and sort of remains on the brink. And the dollar is alive and well. NY state is quite a bit smaller an economy than California. Why would a smaller economy do the sort of harm to the dollar that a larger one didn't?