Given the tragic events in Greece and the financial contamination of other eurozone peripheral countries, most people now recognize that sovereign risk matters and it matters a great deal. Unfortunately, the recognition lag has already caused significant damage, including forcing the current approach to European integration to an historical juncture.
What is less well understood at this stage is that the externalities, negative and positive, are not limited to Europe. It is only a matter of time when this issue, too, becomes a driver of policies and market valuations and correlations.
The general context is critical here, and should never be forgotten. As argued in my March 11 FT commentary, the sovereign debt explosion in industrial countries involves a regime shift with consequential long-lasting effects. And what is happening in Europe is yet another illustration how, in our highly interconnected world, previously unthinkable phenomena can become reality in a surprising and highly disruptive manner.
Rather than just observe, other countries are well advised to understand the debt dynamics at play. They should draw the appropriate policy implications given their own debt burdens, maturity profiles and funding sources.
They must also go well beyond this.