"Bond spreads, along with
their close cousin credit default swaps, are a beautifully linear measure of sovereign
default risk. They go up in a straight and steady line: the higher the number,
the riskier the country is perceived to be. And so they’re normally the first
and last place that people look when they’re interested in the chances of any
given country defaulting.
But of course the world isn’t quite as simple as that, and — as we have learned the hard way — it’s the unexpected defaults which are the most damaging. (...)
What we did was to take a country’s primary deficit — the amount it needs to borrow every year to finance its operations — and add on its total annual debt service. We then took that number and divided it into the country’s total foreign reserves, to get an idea for the length of time that sovereign reserves would be able to fund not only operations, but also all of the country’s debt service requirements.
The results are quite startling.(...) Japan would have only about 14 days."
But of course the world isn’t quite as simple as that, and — as we have learned the hard way — it’s the unexpected defaults which are the most damaging. (...)
What we did was to take a country’s primary deficit — the amount it needs to borrow every year to finance its operations — and add on its total annual debt service. We then took that number and divided it into the country’s total foreign reserves, to get an idea for the length of time that sovereign reserves would be able to fund not only operations, but also all of the country’s debt service requirements.
The results are quite startling.(...) Japan would have only about 14 days."
