Analysts say these countries' looming struggles to repay hefty amounts of debt could haunt their currencies long after the financial turmoil subsides.
Since January, the risk of default by countries such as Britain and some in the euro zone, as measured by prices on their credit default swaps (CDS), has expanded dramatically, prompting a sell-off in the pound and the euro.
"The relationship between CDS and FX could get even stronger as rates converge to zero, making it difficult for investors to differentiate between currencies from a monetary policy perspective," said Michael Hart, European head of FX strategy at Citigroup in London.
"So people would focus more on fiscal concerns and the sustainability of their budgets."
So far, the most worrying country has been Britain, once the bedrock of financial stability.
On Thursday, the cost of insuring UK borrowings spiked to a record high at 148 basis points on Thursday, or $148,000 for every $10 million in debt over a five-year period, according to CMA Datavision.
The rise in CDS prices came after Moody's said UK ratings are being tested by the strains facing the global economy even as Britain has introduced its stimulus package to combat the financial crisis.
But that rescue plan will widen the country's budget deficit to more than 4 percent of gross domestic product in 2009 -- more than any G7 country apart from the United States -- analysts say.
Sterling has fallen as Britain's CDS have surged, losing 2.8 percent so far in 2009.
"I do worry about defaults and that's why I have reduced my sterling positions to zero," said Axel Merk, portfolio manager of the Merk Hard Currency Fund in Palo Alto, California.
"There's just no appetite for the pound," he said. "It doesn't help the British financial institutions that many of the deposits are sterling-based and the loans are in foreign currencies."
U.S. DEBT BURDEN
The widely discussed U.S. debt burden of nearly $2 trillion this year arising from spending to combat the economic crisis has also rung alarm bells and caused the country's CDS to surge.
CDS protecting U.S. debt soared to a near-record high at 84 basis points on Thursday, or $84,000 per $10 million debt as credit conditions in U.S. banks worsened. Investors were also concerned about the huge debt the United States needs to raise in bonds to stem the crisis.
Since January, the risk of default by countries such as Britain and some in the euro zone, as measured by prices on their credit default swaps (CDS), has expanded dramatically, prompting a sell-off in the pound and the euro.
"The relationship between CDS and FX could get even stronger as rates converge to zero, making it difficult for investors to differentiate between currencies from a monetary policy perspective," said Michael Hart, European head of FX strategy at Citigroup in London.
"So people would focus more on fiscal concerns and the sustainability of their budgets."
So far, the most worrying country has been Britain, once the bedrock of financial stability.
On Thursday, the cost of insuring UK borrowings spiked to a record high at 148 basis points on Thursday, or $148,000 for every $10 million in debt over a five-year period, according to CMA Datavision.
The rise in CDS prices came after Moody's said UK ratings are being tested by the strains facing the global economy even as Britain has introduced its stimulus package to combat the financial crisis.
But that rescue plan will widen the country's budget deficit to more than 4 percent of gross domestic product in 2009 -- more than any G7 country apart from the United States -- analysts say.
Sterling has fallen as Britain's CDS have surged, losing 2.8 percent so far in 2009.
"I do worry about defaults and that's why I have reduced my sterling positions to zero," said Axel Merk, portfolio manager of the Merk Hard Currency Fund in Palo Alto, California.
"There's just no appetite for the pound," he said. "It doesn't help the British financial institutions that many of the deposits are sterling-based and the loans are in foreign currencies."
U.S. DEBT BURDEN
The widely discussed U.S. debt burden of nearly $2 trillion this year arising from spending to combat the economic crisis has also rung alarm bells and caused the country's CDS to surge.
CDS protecting U.S. debt soared to a near-record high at 84 basis points on Thursday, or $84,000 per $10 million debt as credit conditions in U.S. banks worsened. Investors were also concerned about the huge debt the United States needs to raise in bonds to stem the crisis.
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