The editorial pages of this newspaper have for quite some time been saying it is fallacious to believe that financial risk is no longer a threat to the global economy.
All that has happened is that the taxpayer bailout of the Western financial system shifted risk from the private sector to governments. The recent round of fears about the solvency of deficit-ridden European economies comes in the wake of the Dubai default fears in November. This is likely to be the year of sovereign risk worries.
The cost of insuring bond portfolios against defaults by select European governments has shot up this week. This risk aversion has also spread to the equity markets, which have tumbled. Indian stocks have not been able to stand upright in this new gale.
The new financial fears come even as the growth in economies such as India and China bounces back. We may see a tussle between sovereign default fears and a strong economic recovery in Asia. Call it the battle of Brics (Brazil, Russia, India and China) versus PIGS, the new acronym to describe Portugal, Ireland, Greece and Spain.