The view from Brussels is that any default would spread to other countries and that it would undermine the credibility of the single currency and so the European project.
The fall of the rupiah sparked concerns about an Indonesian debt default that could spread to Thailand, hurt the fragile Japanese banking system and undermine South Korea's efforts to contain its economic problems.
If Greece is allowed to default, contagion will spread to Spain, Italy and even to France.
FORBES: Don't Hold Your Breath For A Brussels Solution To Europe's Crisis
Optimism that Chinese investment will squelch the spread of sovereign default contagion sent stocks shooting to their best levels of the day by the close of trading.
FORBES: Talk Of China Bankrolling Italy Gives Stocks Late Lift
One way to visualize the damage from ZIRP is to recognize that the spread between real and nominal interest rates is analogous to the spread between rates on default-free and risky debt.
The catalyst for such a market decline is liable to come out of Europe again, perhaps from an actual debt default by Greece, or a worsening spread of the crisis to Italy or Spain.
The spread on five-year credit default swaps took less time to decline to normal (around 300 basis points) after tripling in 2008.
Here is a chart which shows the credit spread of high yield bonds vs. the default rate of high yield bonds since 1997.
While a sovereign default in any one of these European countries would not have a lasting or consequential impact on the capital markets as a whole, the real risk here, in my opinion, is the contagion effect that could spread to other larger European economies should the default not be contained to any one or two of the smaller economies.
FORBES: Raising The Debt Ceiling Is Just Kicking The Can Further Down The Road
FridsonVision, a research firm, publishes a default-rate predictor based on the percentage of bonds trading with a spread of at least 1, 000 basis points.
More critically, these risks can spread like wild fire as we saw in collateralised debt obligations and credit default swaps markets.
FORBES: Dark Pools: The Menace Of Rising Opacity In Financial Markets
Just as in the past, high yield bonds trade at an interest rate spread over Treasury bonds, which are more liquid and less subject to default risk.
Another benefit is that bond funds spread out their positions over many individual issues, and this can reduce credit (default) risk.
FORBES: 5 Reasons Why Bond Funds Can Help You Navigate Bond Market Headwinds Successfully
应用推荐