Below is a price chart for a credit default swap (CDS) on US debt. This is basically the cost per year to insure against US default for five years. In late 2008 and into early 2009, investors were extremely worried about countries defaulting. Five-year CDS prices (in euros) for US debt rose from about 8 bps to 100 bps, but they have since dropped to about 40 bps. Along with the drop in US default risk, all but three (Japan, Israel, Ireland) of the 38 countries in the table below have seen default risk decline in 2009.
Russia and China are in the top five of countries that have seen default risk decline the most. Germany and France haven't seen their default risk decline by much, but it also didn't rise nearly as much as other countries during the height of the crisis. Germany, France, and the US have the lowest default risk in the world.
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What is the point of CDS's on a fiat currency? Why would any country with a fiat currency default on its debt when it can just pay the debt by printing more money? It would seem that the only thing CDS's are insuring against is the ability of the country to buy paper and ink.
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