The government risk index (GRI), an unweighted average of credit default swap (CDS) spreads on the debt of seven key sovereign issuers, has broken out of its tight trading range of the last few months and is trading at levels last seen in July, according to Credit Derivatives Research LLC, the index’s compiler.

The GRI indicates the average cost of insuring against the default of the seven index components over a five year period, measured in basis points (hundredths of a percentage point).

In particular, CDS spreads on Japan, the US and the UK have risen by over 40% since October 1, according to CDR. Spain and Italy, the riskiest members of the index, are both up about 20% over the same period, while Germany’s CDS spread is almost unchanged and France’s trades modestly higher.

As an example of G7 fiscal strains, the UK government today announced public borrowing of £11.4 billion for October, substantially more than economists’ forecasts of £7 billion. UK public sector borrowing is set to overshoot the government’s forecast of £175 billion (12.5% of UK GDP) for the fiscal year.

At today’s level of 53 basis points, the GRI index is nearly 15 times higher than the 3.6 basis points recorded at the beginning of 2007. However, the index is still well short of its record high of 131 basis points, recorded on 17 February this year.

Sovereign CDS trading volumes have increased substantially this year say market participants, although they represent only around 6% of overall global turnover, according to the International Securitisation Review.

Dave Klein, manager of CDR’s credit indices, said: “As the financial crisis kicked into gear in the fall of 2008, the GRI lagged the rise in corporate credit risk. This autumn, the sovereigns led the way wider. If this trend continues, then we would interpret that as the market taking a view on rising systemic risk. In other words, a continued rise in the GRI is an early warning sign that market participants expect a stall in global economic recovery and we would expect corporate credit (and equities) to deteriorate. An even wider GRI in December would be a grim portent for 2010.”