What is Sovereign Debt?
Historical Background
Key Points
9 points- 1.
Sources: Can be borrowed from domestic creditors (e.g., local banks, pension funds, individuals) or foreign creditors (e.g., international banks, other governments, international organizations like the IMF and World Bank, and foreign bondholders).
- 2.
Instruments: Typically issued through government bonds (e.g., treasury bills, notes, bonds) or obtained as direct loans from other governments or international financial institutions.
- 3.
Currency Denomination: Can be denominated in the domestic currency or in foreign currencies (e.g., US Dollar, Euro). Foreign currency debt carries exchange rate risk, making it more vulnerable during currency depreciations.
- 4.
Debt-to-GDP Ratio: A key indicator of a country's debt sustainability, calculated as the total sovereign debt divided by the Gross Domestic Product. A high ratio can signal potential difficulties in repayment.
- 5.
Debt Service: Refers to the payments of principal and interest on outstanding debt obligations. A high debt service burden can strain a country's budget.
- 6.
Default: Occurs when a sovereign state fails to meet its debt obligations. This can lead to severe consequences, including loss of market access, credit rating downgrades, and economic instability.
- 7.
Debt Sustainability: The ability of a country to meet its current and future debt obligations without recourse to exceptional financial assistance or default, while maintaining economic growth.
- 8.
Credit Rating Agencies: Institutions (e.g., S&P, Moody's, Fitch) that assess a country's creditworthiness and its ability and willingness to pay its debt, influencing borrowing costs.
- 9.
Fiscal Deficit: A primary driver of sovereign debt accumulation, as governments borrow to cover the gap between their expenditures and revenues.
Visual Insights
Understanding Sovereign Debt
Mind map illustrating the key aspects of sovereign debt.
Sovereign Debt
- ●Types of Sovereign Debt
- ●Factors Affecting Sovereign Debt
- ●Debt Sustainability
- ●Consequences of High Debt
Recent Developments
5 developmentsGlobal sovereign debt levels have surged due to increased government spending during the COVID-19 pandemic and other crises, raising concerns about debt sustainability.
Increased debt distress in developing countries, particularly in Africa and Asia, exacerbated by rising interest rates and global economic slowdowns.
China's growing role as a bilateral creditor has complicated traditional debt restructuring processes, as it often operates outside established creditor forums like the Paris Club.
The G20 Common Framework for Debt Treatments aims to provide a coordinated approach to sovereign debt restructuring for low-income countries, including all major creditors.
Sri Lanka's 'substantial foreign debt' is a prime example of sovereign debt that has become unsustainable, necessitating international intervention and restructuring.