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 danger of default would disappear, as would risk premiums.

A tighter Fiscal Compact would practically eliminate the risk of default.

Their currency may depreciate, but the risk of default is absent.

And, if Spain is at serious risk of default, government solvency is at risk throughout the eurozone except in Germany.

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

No one believes that Germany is at risk of default, but investors overlook this sort of policy shift at their own risk.

But if many people start to doubt Italy s solvency and require a large premium to lend, the country s fiscal deficit will worsen, and it will most likely default.

If Europe credibly volunteered funds to buy back all Greek debt, the Greek risk premium would disappear and private investors would be fully bailed out. Only the probability of a default and the goal of avoiding even deeper haircuts can induce investors to liquidate their positions at a discount.

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.

The risk of default or debt restructuring induces creditors to be more careful in their lending decisions.

The consequences of a US default have rightly been described with growing alarm as the risk increases.

By being less concerned with preventing default, we can make risk and reward more congruent with each other.

Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default.

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

These steps, it is argued, have taken both sovereign default risk and a banking crisis off the table.

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.

It led directly to the spread of financial risk management models, which, by excluding the possibility of default, grossly underestimated the amount of risk in the system.

A sovereign default in Europe will never be a mere value to be plugged into some statistical risk model.

When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically.

By creating the European Central Bank, the member states exposed their own government bonds to the risk of default.

By refusing a planned and orderly restructuring, the eurozone is exposing itself to the risk of a messy default.

US municipal bonds are already trading at huge risk premia, and the first big government default hasn t even hit yet.

Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy s chronically large sovereign debt.

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.

What resulted was a wonderful system for diversifying individual bank risk, but only by magnifying the default risk of all banks that held what came to be called toxic debt.

These divergent yields reflect the market s perception of the risk of default or of effective devaluation associated with leaving the euro.

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.

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.

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.

The European Commission s claim that this slowdown reflects high sovereign default risk, rather than fiscal consolidation, is belied by the UK, where the sovereign risk is deemed by markets to be virtually nonexistent.

This requires, first and foremost, determining who the investor or the bank bears the underlying default risk of high yield wealth management products.

My own sarcastic reaction was to think, Oh, now the IMF thinks that some of the core eurozone countries are a default risk.

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.

But the metamorphosis tends to go hand in hand with localized monetary contractions that exacerbate the correlated risk of sovereign default and bank failures.

A similar battle is now brewing about America s debt ceiling, which, if unresolved, introduces the risk of a technical default on US 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.

Default

Banks and other financial firms borrow short increasingly in recent years from the commercial securities market, not deposits and lend long at higher interest rates, taking on both credit risk (of default) and interest rate risk.