As a result, the risks of debt deflation and eventual disorderly sovereign and private sector defaults are rising.

So, in both cases, when a debt is defaulted upon or loans become non performing, the negative consequences are felt by the entire financial and monetary zone the entire EU and all of China.

There were also the two defaults through inflation in 1920 and 1923.

Portugal might follow Greece in a sovereign default and in leaving the eurozone.

First, governments should not be pushed into insolvency just to save all banks.

That money must come from higher taxes, from eroding the real value of money balances and government debt through inflation, or from outright default and debt restructuring.

A wave of state defaults followed in the late 1830 s.

Instead of defaulting, countries arranged rescue packages with the IMF.

Despite a messy default, this fresh start has generated a remarkable turnaround.

The costs of default depend on how messy things become when payments stop. What are the legal difficulties?

Given the enormous cost of a default, any government should stay far away from the danger zone.

The second lesson, and the one most pertinent to Europe now, concerns the crucial role played by the default scenario.

The only way out is for Greece to default on its sovereign debt.

Most of the big Latin American debtors took extraordinary pains to avoid an explicit default.

At some point, these countries may well choose to default on their external obligations rather than endure the pain.

More importantly, a default in 2010 would have left some room for adjustments.

There, too, governments widely guaranteed private sector debt, and then proceeded to default on it.

From 2010 onwards, governments started to raise taxes and cut spending in response to growing fears of sovereign default.

Greece is heading towards disorderly default and or devaluation with incalculable consequences.

Perhaps Italy can survive, because most of its debt is held domestically, which makes default less likely.

Banks balance sheets were by then filled with vast amounts of risky mortgages, packaged in complicated forms that made the risks hard to evaluate.

The alternative for Greece is to manage its default in an orderly manner.

BEIJING In the last 200 years, there have been more than 250 cases of sovereign debt default, and 68 cases of domestic debt default.

Default was followed by nominally voluntary restructurings in which creditors were invited to take some losses.

Either officials recognize immediately the inevitability of default and waste no resources trying to prevent it, or they believe that a default can be avoided and deploy all the resources at their disposal as fast as possible.

The housing recession the worst in US history and worsening every day will eventually see house prices fall by more than 20 , with millions of Americans losing their homes.

Second, banks would also suffer because they had sold insurance against default in the form of credit default swaps.

Europe wide bank recapitalization is essential in the short term to contain the cost arising from possible sovereign defaults.

The Germans should recall the last episode of widespread sovereign default Latin America in the 1970 s.

What history tells us here is that defaults are not the privilege of poor, under governed countries.

Ditching the euro might trigger a banking crisis, capital flight, inflation, and perhaps even sovereign default.

Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default.

Or it could be a soft default in which Greece unilaterally services its existing debt with new debt rather than paying in cash.

The crises in Ireland and Greece called into question the euro s viability and raised the prospect of a debt default.

In the event of sovereign defaults, moreover, the cost of bailing out the banks may far exceed the cost of issuing Eurobonds or instituting a reasonable transfer regime.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

A debt buyback is something of a Catch 22 to succeed in inducing a haircut, it needs to profit from the default fears that it intends to alleviate.

Several major lenders absconded with large amounts of deposits, and defaults by ordinary companies have become a serious concern.

At the same time, a technical default by Greece was avoided, and the country implemented a successful if coercive restructuring of its public debt.

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

First, a trillion dollar bailout package in May prevented an immediate default by Greece and a break up of the eurozone.

That was also true of credit default swaps, which became an instrument of speculation instead of insurance and reached an astounding 62 trillion in volume.

This was deemed a credit event, so credit default swaps were exercised anyone who insured against default had to pay out.

With lower nominal income and the same level of debt, the threat of default necessarily increases.

The 1930 s are relevant here as well, given another series of defaults among European states, not least Germany.