Monthly Archives: July 2011

Is Default the Default Option?

Sovereign default is a political choice. There is no specific tipping point where a country’s debt becomes economically unsustainable, and default inevitable.

Market perception of default risk, as measured by the interest rate charged, is determined by a country’s track record in servicing its debts as well as by the size of its debt, the size of its economy, and the rate at which both are growing.

Unlike people, countries never repay their debts; they just roll them over.  In this way, a country can theoretically support a very large national debt, so long as the bond market is willing to lend at a manageable interest rate. Continue reading

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