Sovereign Debt (2024)

Government debt owed by a country, a sovereign nation

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What is Sovereign Debt?

Sovereign debt is the government debt of a country, a sovereign nation. It is also referred to as government debt, national debt, public debt, or country debt. The sovereign debt of a country consists of all its debt liabilities to both domestic and foreign creditors.

Sovereign Debt (1)

Technically, the sovereign debt of a country is a liability of the government rather than a direct liability of the citizens of the country. However, in more practical terms, since the debt can only be paid off with revenues the government collects – such as taxes – the debt is a liability of all the country’s citizens.

Governments are rated on their sovereign debt. A country’s sovereign credit ratings indicate to investors how financially sound the country is considered to be and, to a large extent, determine how easy or difficult it is for the country’s government to borrow money to fund its operations.

Summary

  • Sovereign debt is the government debt owed by a country, a sovereign nation.
  • The debt exists in the form of government-issued securities and direct loans from financial institutions.
  • Sovereign debt is often broken down into debt owed to foreign creditors versus debt owed to domestic creditors.

Stock and Flow Debt Obligations

Sovereign debt is characterized as a “stock variable” – a specific quantity (of money) as measured at a specific point in time. It is in contrast to a “flow variable,” which is a quantity measured over a designated period of time, such as one year or one accounting period.

The flow variable of government debt is the deficit, the shortfall between government spending and revenues collected for a single year. The sovereign debt of a government is the sum of all the deficit flow variables.

For example, assume that over the past decade, a government incurred an annual deficit of $1 million each year. Further assume that before the start of that 10-year period, the government reported no debt liability at all. In such a case, the sovereign debt of the country’s government measured at the given point in time would be $10 million.

Components of Sovereign Debt – Examples

As stated, sovereign debt represents a national government’s debt liabilities to both domestic creditors and foreign creditors. Foreign creditors of a country’s government consist primarily of foreign governments whose central bank previously purchased government bonds issued by the nation in question. Countries with relatively lower sovereign credit ratings, which may face difficulty attracting investors, must offer higher interest rates. If they are still unable to attract a sufficient number of investors, they may incur sovereign debt by borrowing money from entities like the World Bank.

Domestic creditors are typically a more diverse group made up of a country’s own central bank, other banks and financial institutions, state and local governments, large institutional investors (such as pension funds, mutual funds, and insurance companies), and individual investors.

In its official calculation of government debt, the United States excludes debt liabilities owed to the Federal Reserve, its central bank, as it views that money as being money the government essentially owes to itself. It is significant because the Federal Reserve is a major purchaser of US government securities.

Sovereign debt exists in the form of loans and, primarily, government securities of varying maturities. It is sometimes classified into short-term sovereign debt – the debt obligations of a government that are scheduled to be paid off within a year or less – and long-term sovereign debt – debt liabilities that are not due until more than one year into the future.

For example, the U.S. government issues Treasury bills with maturities that range anywhere from within a few days to a maximum of 52 weeks (one year), Treasury notes with maturity dates of between two years and 10 years, and Treasury bonds whose maturity dates are 20 to 30 years in the future.

Sovereign Debt Ratings of Countries

In addition to credit ratings on their sovereign debt that are made by agencies, such as Standard & Poor’s, the outstanding sovereign debt of countries is often evaluated in terms of a country’s gross domestic product (GDP). For example, as of 2018, the U.S. sovereign debt was approximately 78% of its GDP. The sovereign debts of Canada and the United Kingdom equal approximately 89% of their respective GDP levels.

Among the countries with the relatively highest amount of sovereign debt are Japan (236% of GDP, as of 2018) and Greece (181% of GDP).

The countries with the lowest amount of sovereign debt obligations include Macau and Hong Kong, both of which hold sovereign debt totaling less than 1% of GDP.

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Sovereign Debt (2024)

FAQs

What is sovereign debt in simple terms? ›

Key Takeaways

Sovereign debt is debt issued by the government of an independent political entity, usually in the form of securities. Several private agencies often rate the creditworthiness of sovereign borrowers and the securities they issue.

Is sovereign debt a problem? ›

Like people and companies, sovereigns can struggle to repay their debt. This could be because they borrowed too much or in a way that was too risky—or because they were hit by an unexpected shock, such as a deep recession or a natural disaster.

What is sovereign debt relief? ›

The sovereign debtor is the country pursuing or in need of debt relief. It includes not just the central government, but also state-owned or state-backed entities whose debts are guaranteed by the government. The creditors are any entities that have lent to a sovereign.

What is sovereign debt quizlet? ›

debt owned by the government.

Why is sovereign debt bad? ›

High sovereign debt levels are associated with slower economic growth and rising default risk. Government borrowers able to issue bonds in their own country's currency are less likely to default.

Who owns US sovereign debt? ›

There are two kinds of national debt: intragovernmental and public. Intragovernmental is debt held by the Federal Reserve and Social Security and other government agencies. Public debt is held by the public: individual investors, institutions, foreign governments.

Who is America in debt to? ›

The public owes 74 percent of the current federal debt. Intragovernmental debt accounts for 26 percent or $5.9 trillion. The public includes foreign investors and foreign governments. These two groups account for 30 percent of the debt.

Who owns the most U.S. debt? ›

  1. Japan. Japan held $1.15 trillion in Treasury securities as of January 2024, beating out China as the largest foreign holder of U.S. debt. ...
  2. China. China gets a lot of attention for holding a big chunk of the U.S. government's debt. ...
  3. The United Kingdom. ...
  4. Luxembourg. ...
  5. Canada.

Who does the US owe the most money to? ›

Nearly half of all US foreign-owned debt comes from five countries.
Country/territoryUS foreign-owned debt (January 2023)
Japan$1,104,400,000,000
China$859,400,000,000
United Kingdom$668,300,000,000
Belgium$331,100,000,000
6 more rows

Why is sovereign debt good? ›

Public debt, or sovereign debt, is an important way for governments to finance investments in growth and development.

What happens in a sovereign debt crisis? ›

A sovereign default is a nation's failure to repay its debt obligations. It has serious economic consequences for the nation, making it expensive or impossible for it to borrow money in the future. It also causes domestic turmoil.

How much sovereign debt does the US have? ›

As of December 2023, total federal debt was $33.1 trillion; $26.5 trillion held by the public and $12.1 trillion in intragovernmental debt.

What is an example of a sovereign debt? ›

What is sovereign debt?
  • Treasury bills. drop dowm. A treasury bill has the shortest term to maturity (3, 6, 12 and 18 months). ...
  • Treasury notes. drop dowm. A treasury note has a term to maturity of between two and five years. ...
  • Treasury bonds. drop dowm. Treasury bonds are similar to treasury notes.
Oct 6, 2022

Who has the largest sovereign debt in the world? ›

Profiles of Select Countries by National Debt
  • Japan. Japan has the highest percentage of national debt in the world at 259.43% of its annual GDP. ...
  • United States. ...
  • China. ...
  • Russia.

What happens when sovereign debt defaults? ›

Sovereign default is the failure by a country's government to pay its debt. Sovereign default inevitably slows the nation's economic growth and hampers investment from overseas. Overwhelming debt is the main cause of sovereign default.

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