Sovereign Debt

Examples of Sovereign Debt in the following topics:

• The Public Debt

  • Government debt, also known as public debt, or national debt, is the debt owed by a central government.
  • Government debt, also known as public debt, or national debt, is the debt owed by a central government.
  • Sovereign debt usually refers to government debt that has been issued in a foreign currency.
  • Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
  • Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.

• Deficit Spending, the Public Debt, and Policy Making

  • Government debt is the debt owed by a central government.
  • Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders).
  • Sovereign debt usually refers to government debt that has been issued in a foreign currency.
  • Otherwise the debt issuance can increase the level of (i) public debt, (ii) private sector net worth, (iii) debt service (interest payments) and (iv) interest rates.
  • US public debt consists of two components:

• Ratings

  • Bond credit rating agencies assess and report the credit worthiness of a corporation's or government's debt issues.
  • In investment, the bond credit rating assesses the credit worthiness of a corporation's or government's debt issue.
  • The credit rating is a financial indicator to potential investors of debt securities, such as bonds.
  • Ratings play a critical role in determining the amount that companies (and other entities that issue debt, including sovereign governments) have to pay to access credit markets; for example, the amount of interest that must be paid on issued debt.
  • The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered significantly higher than those associated with first-class government bonds.

• Bond Rating System

  • In investment, the bond credit rating assesses the credit worthiness of a corporation's or government's debt issues.
  • It is analogous to credit ratings for individuals.The credit rating is a financial indicator to potential investors of debt securities, such as bonds.
  • Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets (i.e., the amount of interest they pay on their issued debt).
  • The risks associated with investment-grade bonds (or investment-grade corporate debt) are considered significantly higher than those associated with first-class government bonds.

• Problems of Long-Run Government Debt

  • Government debt limits future government actions and can be hard to pay off because Congressmen are unwilling to do what is necessary to pay down the debt.
  • The problem with debt is that it must be paid off with future revenues.
  • To pay off the debt, the government must maintain a certain level of income.
  • A sovereign credit rating is the credit rating of a sovereign entity (i.e., a national government).
  • The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.

• Credit Ratings

  • How might credit ratings affect companies and other entities that issue debt?
  • How might credit ratings affect companies and other entities that issue debt?
  • A sovereign credit rating is the credit rating of a sovereign entity like a national government.
  • Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries.
  • Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets, such as the amount of interest they pay on their issued debt.

• Government Bonds

  • However, central banks may buy government bonds in order to finance government spending, thereby monetizing the debt .
  • Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.
  • Investors in sovereign bonds denominated in foreign currency have the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds.
  • For example, in the 2010 Greek debt crisis the debt was held by Greece in Euros.
  • Some counter examples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998 (the "ruble crisis"), although this is very rare (see national bankruptcy).

• Default Risk

  • Default risk is the risk that a bond issuer will default on any type of debt by failing to make payments which it is obligated to make.
  • Default risk (or credit risk) of a bond refers to the risk that a bond issuer will default on any type of debt by failing to make payments which it is obligated to do.
  • This image shows the monthly prices of sovereign credit default swaps from January 2010 till September 2011 of Greece, Portugal, Ireland, Hungary, Italy, Spain, Belgium, France, Germany, and the UK (Greece is illustrated by blue line).

• Advantages of Bonds

  • It is a debt security under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon).
  • Bonds are bought and traded mostly by institutions like central banks, sovereign wealth funds, pension funds, insurance companies, hedge funds, and banks.
  • Furthermore, bonds come with indentures (an indenture is a formal debt agreement that establishes the terms of a bond issue) and covenants (the clauses of such an agreement).
  • It is a debt security under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon).

• The Articles of Confederation

  • The Articles of Confederation were an agreement among the 13 founding states, legally establishing the United States of America as a confederation of sovereign states and serving as its first constitution.
  • The states and Congress both incurred large debts during the Revolutionary War, and the federal government assumed these debts when some states failed to settle them.
  • Congress' inability to encourage commerce and economic development—or to redeem the public obligations (debts) incurred during the war—significantly hindered its power.
  • Alexander Hamilton was particularly vocal in arguing that a strong central government was necessary to levy taxes, pay back foreign debts, regulate trade, and generally strengthen the United States.