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

Sovereign Environmental Risk

However, the problem arises when the debt becomes unsustainable and the country faces a risk of sovereign default.

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.

As a result, sovereign risk is now becoming banking risk.

The falling yields at the Italian government s last bond auctions in 2011 suggested a significant reduction in the perceived sovereign default risk.

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

Under both models, investors take on only interest rate risk, not default risk.

Traditionally, sovereign risk has been concentrated in emerging market economies.

In the event of sovereign default, the cost of economic turmoil and post default treatment on human rights would be enormous.

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

In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt to GDP ratios than Germany had. Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy s chronically large sovereign debt.

Eurozone sovereign debt turned out not to be homogenous with respect to risk.

Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further.

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

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

The time has come for a better understanding of the connection between environmental and natural resource risk and sovereign credit risk.

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.

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

But, this time, the default has been triggered by a significant shift in the international sovereign debt regime.

The eurozone s sovereign risk problems could worsen, leading to another round of asset price corrections, global risk aversion, volatility, and financial contagion.

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

The eurozone sovereign debt crisis appears to have been the worst managed financial crisis since Argentina s default in 2001.

Though their loan recipients were high risk by ordinary standards, the default rate was extremely low.

Sovereign risk lending to Governments that have been trapped in debt crises can be difficult to arrange.

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.

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.

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

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

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

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.

NEW YORK Today s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies.

As a result, sovereign risk today is a greater problem in advanced economies than in most emerging market economies.

As for Europe, the Kirchner s have not yet paid off Argentina s debt pending since the default to the Paris Club of sovereign creditors.

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

In addition, these risks vary widely across countries, including countries whose current credit ratings suggest similar levels of sovereign risk.

But sounder fiscal policy might lead to even higher inflows as the country s external balance and sovereign risk outlook improve.

It would be unfortunate if governments requiring financial institutions to be more prudent in managing risk were at the same time asked to turn a blind eye to sovereign risk.

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