Default Risk

Think: what are the odds your buddy Slick Steve will, in fact, pay you back the $100 he's borrowing for the weekend? Will he even remember that he borrowed the money from you? If you're worried about being paid, then by definition, you are worried about Slick Steve's default risk. That is, if you don't trust him to pay back the money, either because he can't or won't, then he carries big risk of being a deadbeat.

Default risk is a huge deal in the bond industry. And it relates to more than just corporations. Entire countries default on their bonds, and the world champion defaulter is Greece, who has had an Olympic-level performance of three defaults in the last few decades. When a country defaults on their debt to the big, fat, dumb peace-loving west, western banks usually just reissue new bonds, papering over the old bonds, and making everything cosmetically pretty.

Given that China has become the largest lender to many emerging countries, with extremely high default risk, and given that China generally backs its debt obligations with its own military, it will be interesting to see what happens when the next set of countries defaults with big loans to China.

Are the new suburbs of Beijing in Libya?