The World of Debt and Default...Part 1

I need to apologize to have just fallen out of the radar. It is important, at times, to just sit back and watch what you have been doing for a while... jot down notes feverishly.. and take stock. The current global scenario also warrants the same, and I would advise our world leaders to do it, Simply because, "It works!!!".
I am back again, and am getting straight to the focuspoint, Greece.

The most talked about topic in around the world is right now the sovereign defaults. The whole brouhaha over the uncertainty involved in European crisis, epicentering Greece.

Interestingly, the first of its kind (sovereign default) also started in Greece in the 4th Century BC. At that time, Greece was governed through small city-states, who had incurred a huge default on the loans taken for state governance from the Delos Temple. This instance of default was neither previously experienced nor encountered as the kingdom/states earned their revenues from trade, extraction of natural resources such as mining and a huge chunk coming from the war booty. The kingdoms simply did not believe in borrowing from the public institutions.

The fact that a state has to be reliant on borrowings underpins the power of the state, and vice-versa its economic and military prowess underpins its power to borrow has not changed. As the conception goes, a powerful (read: economically and militarily superior) state will never borrow.

Now with the changing times, we have come to understand the power of leveraging and so do not see loans from institutions like the IMF as a sin, but a Default is still considered to be the ultimate foreign policy sin, and a sin enough to effect a dire change in the geo-political balance of power.

The concern needs to be highlighted because the default risk, which we might experience, is specifically coming from the developed world countries. Greece is surely the first effective domino in the spread. Portugal, Spain, and Ireland are to be the next in line of casualty. The domino effect is definitely going to bring a lot of pain in terms of stagnant growth, consumption downturn and the ripple effects of the default to countries like Germany, France, the UK, and the US.

The next question which instantly fleets my mind is, “When the big boys are going down, shall we see the emergence of a new developed world (A new world order)?” or in a more Bollywood ishtyle, “Kya picture abhi baki hai, mere dost?”

Well, I think that this time we are going to see a dramatic shift in the geopolitical power mainstay. The Emerging world would be the savior of the world from this mess. I would also not refrain myself from saying that, the kind of widespread default which we are seeing in the West would undoubtedly have a devastating consequences even for the Emerging world too. I would also like to mention a point of my Chinese friend, a student of Economic History in Berkeley, with whom I concur. She thinks that sovereigns who have had floating currencies (not the ones with pegged currency rate), a manageable domestic currency debt, and a Central bank, whose policy making is uninfluenced and independent, have been seen to have negligible credit risk in peace time, a contrarion to the Mundell–Fleming model.

As of record, all the earlier country debt and default crises which we had been through in the last 500 years had more to do with the kind of financial and monetary structural rigidities, an unsteady state of political affairs, military coupe, and severe unprepared shocks and eminent losses such as wars rather than what we are now dealing with; Primary Headline Debt and Deficits.

....to be continued.