The cost of insuring against a British government debt default is the cheapest it has been this year. According to data provider Markit, it now costs $61,000 a year to insure $10 million of British government bonds against default compared with $67,000 at the end of the day on Friday – a hefty drop. This cost stood at $100,000 in early February when some investors were speculating, ahead of Britain’s spring election, that the country might have a Greece-style financial crisis.

 It’s not just Britain. Credit-insurance costs for Greece, Portugal, Ireland, Italy and Spain, which use the euro, are also noticeably lower today, with most of these levels returning to levels last seen two months ago. Basically, derivatives traders like what they see so far in the bank stress test results, though they’re not overjoyed.

 There are still tensions in Europe’s financial system. For one thing, the cost for banks to borrow euros from each other in the so-called “interbank” market – the belly of the financial system – continues to edge worryingly higher. This rising “Euribor” rate suggests banks are still worried about lending to each other.

 But it’s reassuring that the credit-default swaps market, where investors buy insurance against bond defaults, is pointing to an easing of fears about European banks and their debt-laden government overseers.

 The European bank test results could help shore up confidence, even if they don’t put the region’s banking system completely in the clear. Meanwhile, investors aren’t talking as much about a so-called double-dip recession in Europe now.

 Renewed optimism about Europe, meanwhile, can have a positive effect on Britain, which doesn’t use the euro but sends more than 50% of its exports to the 16-nation euro-zone.

 Like Europe, Britain is showing more signs of a home-grown economic recovery. Having taken its turn unveiling an ambitious deficit-cutting program, the U.K. government on Friday reported that its second-quarter GDP jumped by roughly twice what analysts had forecast. Services, construction and manufacturing all contributed to the encouraging quarterly effort, suggesting a broader and healthier recovery. The economy grew faster than it has in more than four years.

 Maybe that’s why the U.K. pound is on a roll: Sterling is trading at $1.5488 against the dollar on Monday evening in London, compared with $1.5170 on July 21 and $1.4336 on May 18.

Font: Wall Street Journal