Spain s huge risk premium has almost disappeared, but its debt problems have not.

Notwithstanding a dysfunctional Congress, the private sector will increasingly convert a paralyzing uncertainty premium, which impedes much investment, into a less disruptive risk premium.

The point at which credit risk becomes exchange rate redenomination risk is ambiguous.

Unlike the PWA program, the Work Premium is a tax credit and is accessible through filing of an annual income tax return.

The risk premium could rise, for example, if investors became uncertain about whether Kuroda would adhere to his commitment.

Credit risk is best hedged through diversification across uncorrelated credits.

As output and consumption become more stable, investors do not demand as large a risk premium. The lower the price of risk, the higher the price of risky assets.

When investors make less risky loans, they require a lower risk premium , thereby reducing the cost of borrowing to the borrower.

Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.

But, if more risk builds up through continued expansion of shadow credit, this risk buffer may become inadequate.

While credit expansion can offset this to some degree, increased production based on credit expansion inevitably leads to large scale financial risk.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk.

So if the firm takes on too much debt, the cost of debt rises as creditors demand a higher risk premium, and ROE decreases.

Indeed, a chain of financial intermediaries now earn fees without bearing the credit risk.

This risk was highlighted by the recent downgrade of Italy s credit rating by Standard Poor s.

In the past, banks kept loans and mortgages on their books, retaining the credit risk.

Moreover, in the case of domestic debt, a higher interest rate or risk premium merely leads to more redistribution within the country (from taxpayers to bondholders).

Moreover, confidence in the Federal Reserve is high, and the last remnants of the 1970's inflation risk premium have been wrung out of interest rates.

When the credit of a country is in any degree questionable, he argued, it never fails to give an extravagant premium upon all the loans it has occasion to make.

They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.

The BOJ would be right to worry, of course, if interest rates were rising because of a growing risk premium, rather than because of higher inflation expectations.

With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.

Freed from exchange rate risk, international investors no longer demanded a risk premium from these countries and were willing to provide funds to all of them under the same favorable conditions that previously had been reserved for Germany.

This would, in its turn, allow banks and other lenders to better assess enterprise risks using modern ICT based techniques for credit risk assessment and credit scoring.

Similarly, positioning the IMF as a general risk insurer by introducing precautionary credit lines above normal access limits would be compatible neither with its mission to provide financial assistance on deliberately non risk adjusted terms nor with the current system of refinancing short term Fund credit through risk free official reserves.

The collective judgment of financial markets on any government s economic and fiscal policy is expressed in the risk premium that the government must pay on its external debt.

In some countries with high levels of debt and impaired growth, fiscal stimulus could raise the risk premium on sovereign debt and be counterproductive others have more flexibility.

Even if this sounds unfair, it is logical to expect rating agencies, which had been lax in evaluating credit risk, now to be rigorous in assessing all forms of risk, including sovereign risk.

In other words, the Fed will use regulatory instruments to control credit growth, risk taking, and leverage.

Clarifying ultimate responsibility for credit quality and risk would also reduce intermediation costs by eliminating the need to resort to informal channels, such as credit guarantee and trust companies.

Innovative financial instruments such as derivatives and credit default swaps enabled the distribution of risk throughout the economy.

Most telling is that Britain, which retained control of its currency, enjoys the lowest yields in its history, while the risk premium on Spanish bonds is at a new high.

Investors thus assumed that they did not need to assess the credit risk of eurozone countries (national) public debt.

The current risk premium for government borrowing in international markets is very similar to that paid by Peru and Brazil, and much less than that demanded of Argentina, Venezuela, and Ecuador.

Meanwhile, deficit and debt indicators have worsened, both in absolute terms and relative to emerging economies, and the average risk premium on advanced economies debt now exceeds that for emerging economies.

The immediate causes are well known. They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.

Like banks, all these financial institutions are subject to liquidity or rollover risk the risk of going belly up if their creditors do not rollover their short term credit lines.

Any risk premium that the Italian government might still have to pay would no longer go to foreigners, but to Italian savers, whose incomes would increase a net gain for the country.

If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the fear premium via precautionary stockpiling of oil by investors and final users.

There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.

Germany will look like a better credit risk, thereby allowing it to fund its current budget deficits more easily and cheaply.

A wage premium based solely on citizenship is grating.

Yet the risk premia on non Treasury assets have soared to barely believable heights the annual interest rate premium for holding a CD issued by a private bank now stands at five percentage points.

This is why interest rate spreads within the eurozone have been widening, with Germany and the Nordic countries benefiting from lower borrowing costs and the problem countries being punished by a high risk premium.

Meanwhile, prolonged low interest rates contributed to a chase for yield in the financial sector that resulted in disregard of credit risk.