Sovereign Debt
Tue, Apr 15Sovereign debt refers to the debt incurred by a central government. It represents the money or credit that a government owes to its creditors. This type of debt is issued by the national government in a foreign currency to support the growth and development of the issuing country.
Typically, sovereign debts include securities, bonds, or bills with maturity periods that can range from less than a year to over ten years. The stability of the issuing government is often indicated by the country’s sovereign credit ratings, which assist investors in evaluating risks associated with sovereign debt investments.
Sovereign debt is also known as government debt, public debt, or national debt.
Sovereign debt can be assessed using various metrics. These metrics are frequently employed to determine whether a country's sovereign debt is excessive in relation to its gross domestic product (GDP) or its capacity to tax its citizens. Additionally, it is important to consider a country's GDP growth rate, as it can significantly impact its future ability to repay debt.
The three most commonly used metrics are:
- Total Public Debt – This figure represents the overall amount of outstanding debt. However, without context, it can be misleading. Therefore, experts often refer to Debt-to-GDP and Debt per Capita as more informative measures.
- Debt as a Percent of GDP – This metric is calculated by dividing the total public debt by the GDP. Countries with a debt level exceeding their GDP (a ratio over 100%) are generally viewed as over-indebted.
- Debt per Capita – This is determined by dividing the total debt by the population. A debt per capita that surpasses per capita income diminishes the likelihood that the government can cover its shortfall through conventional taxation.
International investors can access information on public sector debt through resources such as the World Bank, the CIA World Factbook, or the websites of individual central banks.
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