Volume in the credit default swap market for rich countries has soared and so have credit spreads, according to a recent Financial Times story, while volume in emerging markets CDS has stagnated. In other words, traders are betting against the governments with high budget deficits, like Britain and the United States, as well as against those with high debt levels, like Japan and Italy.

So is there really a substantial chance of a big rich-country default, and what would it look like if it happened?

It’s not obvious which of the “Rich Four” countries would go first.

Japan, for instance, has the highest debt. But Japanese consumers are such great savers that they essentially owe almost all of the debt to themselves.

The country needs fiscal discipline and higher interest rates (to reward Japanese savers properly), but there’s a decent chance Japan will get both, in which case default is unlikely.

Italy has high debt – at about 120% of gross domestic product (GDP) – and not much discipline of any kind. On the other hand.....

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