25 November 2020 by jbchevrel
RBS Group Sub 5-year CDS, along with other UK domestic banks' HoldCo sub CDS (Barclays Lloyds), is close to the 100bp handle and post-GFC tight (~90bp). This is despite the economic outlook in the UK. Government forecasts point toward the deepest recession since the Great Frost of 1709. The UK economy will have contracted -11.3% this year. This drop can be closed by 2022. But the actual GDP gap, at horizon 2025 (compared to what was expected pre-COVID) is estimated at -3%, if UK/EU agree on a Brexit deal. The OBR (BR standing for Budget Responsibility) warned that the GDP impact of the COVID crisis would be -5% instead of 3% in the long run, in case of No-Deal. But the market does not seem to give much credit to that very scenario. The Jobs market will be crucial as the UK’s economy dominated by Services and Consumption. On that chapter, the Unemployment Rate is expected to rise from here (4.8% -SEP) to reach 7.5% next year. Apparently, that could even go to 8.5% under a no-deal path, but again, the market does not seem to give much credit to that scenario. What is the Fiscal Cost? The UK is forecast to borrow £394BN this year (19% of GDP - highest recorded level in peacetime). Among other Fiscal Stimulus highlights are (1) Defense: £24BN plan over 4y (2) Infrastructure: £100BN plan over 5y. No doubt: more borrowing will be needed. The UK government is now planning to issue a record £486BN worth of bonds, this fiscal year. The irony is that today’s headlines make Chancellor Sunak look like a fiscal hawk because of (A) Overseas aid spending cut to 0.5%, from 0.7% (B) Pay rises for public sector workers in non-health roles are being paused.