rather than weak supply. in spite of everything we have gone through, there has been no sovereign default of any advanced country apart from greece since the interwar period. yes, many of these countries have been downgraded lately, but what that means in terms of actual default probabilities is not clear to me at this point, although it might be somewhat clearer after the next session. the fact of the matter is that advanced countries have both considerable means and strong incentives to avoid default. even iceland was able to avoid a default after the collapse of 90 % of its financial sector and its deepest recession since the interwar period. so, for the post - war period, walter wriston has been largely right so far, in saying that “ countries don ’ t go bust ” – as far as advanced countries are concerned – although he was wrong as regards all countries. and what holds for advanced countries in this respect does so increasingly for the more important and advanced emes. i am not denying that sovereign risk has increased, more broadly speaking. higher deficits and debt levels and weaker growth prospects bear witness to this. but the degree to which this translates into higher default probabilities in the narrow sense is not clear. my prediction is that default probabilities will remain low for most advanced countries. what, then, about the reaction of rating agencies and markets? here again, we have the question of what rating agencies are actually trying to measure. i have long experience of dealing with them in my current and past jobs, and i have the sense that they are measuring something more than default probabilities. partly, therefore, a downgrade by one or two bis central bankers ’ speeches notches within an investment - grade category could be consistent with my view. then, on top of that, there is a significant amount of evidence to suggest that ratings do not see through the cycle. so the rating agencies and the markets are probably overestimating sovereign risk at the current juncture, in the same way that they underestimated it prior to the crisis. there is one important proviso to this statement, however : the negative feedback loop between sovereign risk and bank fragility, which in historical terms has been particularly severe in the recent period. thus, for some countries, the markets might be factoring in further socialisation of private sector losses. therefore, in addition to medium - term fiscal consolidation, a weakening of the nexus between sovereign risk and banking fragility is key

they were not necessarily articulated fully at the time, these solutions entailed several goals : preserving a functioning domestic payment system, ring - fencing the sovereign in the case of bank failures, limiting the socialisation of private sector losses, and creating the conditions for rebuilding a domestic banking system. in essence, the adopted solution saved the domestic operations of the banking system by splitting up the banks and allowing the international part to go into a resolution process. furthermore, in order to stop an incipient run on domestic deposits, all deposits in iceland were declared safe and all deposits in icelandic - headquartered banks were given priority over other unsecured claims. as a result of these measures, the domestic payment system functioned more or less seamlessly throughout, and common citizens had continuous access to their deposits. bis central bankers ’ speeches there are still a number of misconceptions about this process in international discussions. there have been claims that iceland allowed its banking system to collapse, with what now seem reasonable results, and that others should consider doing the same. the fact is that iceland kept the domestic part of its banking system running throughout ; otherwise, the consequences would have been dire. some have claimed that the banks were nationalised. they were not. the old banks are private companies. they are in winding - up proceedings governed by law ; they are not under the control of the government. the government has a majority stake in only one of the new banks. others have claimed that iceland defaulted and got away with it. the opposite is true. the credit of the sovereign was preserved, and all debt obligations have been paid on time. moreover, the investment - grade credit ratings from moody ’ s and s & p were preserved throughout the crisis. this is why the sovereign has been able to tap international capital markets twice so far since the crisis struck. so the bottom line is that a sovereign default was avoided in spite of an almost unprecedented financial collapse and the worst economic recession since the interwar years. a key to that result was the ring - fencing of the sovereign from the collapse of the private banks. all debt service payments on sovereign debt, in both domestic and foreign currencies, have been made in full and on time. but the avoidance of default during the crisis does not come without the willingness to use the means available to avoid that outcome, even in very adverse situations, and the ability to endure the temporary hardship that comes with it. in addition, iceland – like ireland, probably – was helped by