Assessing the risk that Greece’s woes herald something far worse

HOW far is it from Athens to America and which countries lie on the way? That may sound like an esoteric geography question, but it is being asked by investors as Greece’s debt crisis creates global jitters about the safety of sovereign debt. So far Portugal, Ireland and Spain, the other high-deficit countries on the periphery of the euro zone, are thought to be next in line. In most big rich economies, yields have been stable and well below their long-term average (see chart).

But nerves are fraying elsewhere. The cost of insuring against sovereign default has risen in 47 of the 50 countries for which these instruments exist. Dubai’s sovereign credit-default-swap spreads soared to their highest level in a year this week, amid concern about the terms of a debt restructuring by a state-owned conglomerate. There is increasingly shrill commentary arguing that Greece is the start of a far bigger problem. “A Greek crisis is coming to America”, blared the headline on a recent Financial Times article by Niall Ferguson, a financial historian. …