No.
Or:
Britain is not Iceland. Iceland is the size of Coventry. Britain is the fifth-largest economy in the world (although it also has the third-largest current account deficit). The pound is still a reserve currency that people want to buy, despite the efforts of the speculators. We are bankrupt only in the sense that we could not pay if all debts were called in right now – which is true of many countries. A falling pound will be good for exports, assuming there is someone to buy them. The UK’s credit rating was reaffirmed last week. The only thing that could push Britain into bankruptcy would be a full-scale panic.
But so long as a significant number of people think "£1m worth of Treasuries – safe, £1m worth of Treasuries plus £10,000 worth of CDS – saferer", you can make money writing insurance you'll never have to pay out on.
Thanks for the link John. It seems Ken Clarke, the Provisional Shadow Chancellor, agrees.
I hope we both turn out to be right!
Alex – this does, incidentally, suggest that sophisticated [1] financial investors fall prey to the same psychological trick that the offer of extended warranty cover uses…
[1] Insert sarcastic quotation marks to taste.
To be fair to 'sophisticated' financial investors, it may be more about 'nobody ever got fired for…' syndrome than a genuine belief held by the trader that the cover is useful.
Partially inspired by having to write an email complaining about their fees, one of the tacit reasons why people get an audit from the Big Four is that they have huge PII cover (which costs a fortune). This suggests to me that audit committees might be better serving their shareholders by getting the company audited by Bloggs, Cobbley and Doe LLP and recommending that the financial stakeholders take out enough derivatives to cover their losses any audit failings that may arise…
Typically* the cost of CDS has equalled the difference between the reference bond and the safest (in this case Bunds, I guess). Thus all the Treasury needs to do is bundle a UK Gilt CDS with every Gilt. This will cost nothing as the now the bonds are risk-free the spread over Bunds will decline by the same amount as the CDS costs. Oh yes.
* i.e. when no-one thought they would ever be used. Does anyone what the outstanding issue of CDS on UK sovereign debt is? I remember a BIS study a few years back saying triple-A rated soveign debt CDS were tiny.