Sovereign Debt Overview
the national debt is a combination of both internal and external debt. the external debt is referred to as sovereign debt. sovereign debt refers to bonds issued by a nation's government in a foreign currency and sold to foreign investors. typically, loans to a government are seen as extremely safe because ? the government ?, legislators can simply raise taxes or print more money to pay that debt off. sovereign debt is a bit riskier as the issuer doesn't have the ability to create more currency. to pay off sovereign loans, the government would have to come up with the loan amount in the foreign currency in which it sold the bonds. most developed countries have enjoyed the trusted international investors who believe their stable economies made them creditworthy. that view changed somewhat in light of the european sovereign debt crisis where several countries saw the interest rates on their bonds skyrocket due to impending loan defaults. a key aspect of sovereign debt is that it is unsecured. if ? nation is unable to repay its bond holders, the investors can't claim any government assets. this increases the sovereign risk of the nation. the higher the sovereign risk, the higher the probability of a sovereign default. this in turn could lead to investors demanding a higher interest rate on these bonds which would eventually lead to a sovereign debt crisis. if ? nation defaults, raising capital in the future will become more difficult and much more expensive. for this reason, countries that rely on sovereign debt will sometimes place official limit on their credit spending. but, ? several european countries have shown, unexpected economic events can quickly increase debt to an unmanageable level. when a nation doesn't control the currency, it puts itself in a box. investors would do well to research a country's spending patterns and sovereign risk rating before determining the appropriate return on a loan.
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