But, for the most part, the sovereign default process is slow motion Kabuki theater.

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.

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

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

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

The economists Carmen Reinhart and Kenneth Rogoff have studied centuries of sovereign debt crises, and remind us that today s developed world has a forgotten history of sovereign default.

Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults.

And, without a rapid return to growth, more defaults and social turmoil cannot be avoided.

Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won t happen?

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

Avoiding default may be possible, but it will not be easy.

They know that debt default would be disruptive.

The official line so far has been no default, meaning no sovereign default or that of any bank can be considered.

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

Optimists argue that the short run macroeconomic impact of the deal to raise America s debt ceiling and prevent sovereign default will be limited roughly 25 billion in expenditure cuts in the coming year.

And, after the recent EU summit agreed on an ultima ratio rescue plan for eurozone countries facing the danger of default, chances are high that it will not materialize.

But a recent New York court ruling against Argentina in a case brought by a holdout hedge fund creditor has dramatically raised the stakes of sovereign default and bankruptcy.

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

Many see Greece as the potential first domino to fall in a scenario that runs as follows the Greek austerity measures do not suffice, the debt crisis deepens, and the risk of a sovereign default spreads to other European economies.

How to Default on Sovereign Debt

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

After all, in the last decade or so, Russia, Argentina, and Ecuador defaulted on their public debts, while Pakistan, Ukraine, and Uruguay coercively restructured their public debt under the threat of default.

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

But they can reduce interest rates by eliminating the perceived risk of sovereign default. Banks will be able to borrow from one another for less, and thus able to lend to firms for less.

Investors need to be reassured that debt service costs are under control, and that debt volumes and deficit limits are firmly monitored in order to minimize default risks and strengthen banks ability to lay the groundwork for sustainable growth.

And a stronger economy would help domestic banks by reducing potential bad debt and mortgage defaults.

Default and an exit from the euro would occur well before that.

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

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

That s why market interest rates on privately held Greek bonds and prices for credit default swaps indicate that a massive default is coming.

Easier monetary policy may boost liquidity, but it will not resolve the solvency crisis.

Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.

The Euro Zone s Default Position

Credit Default Swaps on Trial

France in the ancien régime repeatedly imposed semi default on its creditors by reducing interest rates and extending maturities.

But very little was done to strengthen the financial system s ability to withstand a default of any significant magnitude.

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.

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

Philosophically, the debt forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place.

Like most Americans, China s leaders believe that the US will ultimately dodge the bullet of an outright default.

Reimbursement of salary for the time of temporary incapability for work,

PRINCETON There are historical precedents for sovereign debt defaults by the countries of Europe s southern periphery, but they are not instantly attractive ones.

Moreover, defaults on securitized credit card debt and commercial loans to companies that are driven to bankruptcy are still to come.

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

Identifying and addressing problems when intervention is not urgently needed is much easier than working them out under the threat of a pending sovereign default.