Sri Lanka paid a US$1 billion bond last week, but the alarming state of its finances suggests it may have been just another step towards its first sovereign default.

All the tell-tale crisis signs are there: bonds at nearly half their face value, debt-to-GDP levels above 100 percent, over 80 percent of government revenues being spent on interest payments alone and barely enough reserves to cover a few months of spending.

Chances of the island nation soldiering on alone look slim, especially with...