  During the last two years, Europe has been facing a debt crisis, and Greece
has been at its center. In response to the crisis, drastic actions have been
taken, including the halving of Greek debt. Policy makers acted because
interest rates for sovereign debt increased dramatically. High interest rates
imply that default is likely due to economic conditions. High interest rates
also increase the cost of borrowing and thus cause default to be likely. If
there is a departure from equilibrium, increasing interest rates may contribute
to---rather than be caused by---default risk. Here we build a quantitative
equilibrium model of sovereign default risk that, for the first time, is able
to determine if markets are consistently set by economic conditions. We show
that over the period 2001-2012, the annually-averaged long-term interest rates
of Greek debt are quantitatively related to the ratio of debt to GDP. The
relationship shows that the market consistently expects default to occur if the
Greek debt reaches twice the GDP. Our analysis does not preclude
non-equilibrium increases in interest rates over shorter timeframes. We find
evidence of such non-equilibrium fluctuations in a separate analysis. According
to the equilibrium model, the date by which a half-default must occur is March
2013, almost one year after the actual debt write-down. Any acceleration of
default by non-equilibrium fluctuations is significant for national and
international interventions. The need for austerity or bailout costs would be
reduced if market regulations were implemented to increase market stability to
prevent short term interest rate increases. We similarly evaluate the timing of
projected defaults without interventions for Portugal, Ireland, Spain and Italy
to be March 2013, April 2014, May 2014, and July 2016, respectively. All
defaults are mitigated by planned interventions.
