What is Sovereign Debt?

Published by Thomas Herold in Banking, Investments

'Sovereign Debt' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Sovereign Debt refers to the amount of money which the government of a given nation owes its various domestic and foreign creditors. It is a synonym to country debt, national debt, or government debt since the word sovereign simply equates to an independent national government. Another way of thinking of this term is that it is the amount of money which the nation owes its outside creditors. This is a good reason why it is commonly interchanged freely with the phrase public debt. Sovereign debt is similarly the total accumulation of the yearly deficits run by a government. For this reason, it reveals the additional amount of money which governments spend over what they realize in revenues cumulatively.

It is mostly through issuing bonds that governments are able to finance their deficit spending. A good example of this is the United States’ Treasury notes and bills. These instruments come with terms ranging from as little as three months to as far out as 30 years. Governments will pay the holders of the notes interest in order to give them a return for loaning the government the money.

As the likelihood of the bond being paid back increases, the interest rate which accompanies it decreases. This leads to a lower cost for carrying sovereign debt for nations which are perceived as trustworthy and financially viable longer term. Besides this financing avenue, governments are able to take out loans from private businesses, commercial banks, and other nations as well as from international individual financiers.

It is not so simple to compare the various sovereign debts of differing nations. Each debt ratings agency has its own emphasis in figuring up debts for sovereigns. As an example, Standard & Poor’s’ as an investors and business measuring debt ratings agency only considers those debts which the country owes its commercial lenders. It will not consider the money the country owes other countries, the World Bank, or the International Monetary Fund. It also will only include the national debt, and not the amount that provinces, states, cities, and counties in the nation owe.

With the European Union, it measures debt more broadly. It restricts the total amount of debt that its member states are allowed to maintain while being members of the EU. This would include local and provincial governments’ debts and any amounts of future social security types of obligations that have been promised to citizens.

The United States itself considers debt still differently. Money which it owes other departments of its own government, called intra-governmental debt, it does not count. It also never includes any debts that the states, counties, and cities have incurred. As the overwhelming amounts of city and state governments are not permitted to run up deficits, it is generally a non-issue.

It is true that expanding the national debt increases growth. The simple explanation is that when governments increase their spending on health care, social security, or for new warships, they are rapidly flushing money through the economy as a whole. This increases economic growth (even if only temporarily) since businesses will then expand in order to keep up with the government spending-driven, rising demand.

This generally leads to new jobs. A multiplier effect becomes created as this increases growth and demand still more, leading to a virtuous cycle. This is why deficit spending is always considered to be a potent stimulant economically since the demand appears instantly while the cost for the debt is delayed into the future.

So long as the amount of sovereign debt is at a reasonable level the lenders to the nation are not worried. The higher growth means that they can be more easily paid back with their owed interest. The leaders in government want to spend constantly for the very simple reason that expanding economies equate to happy voters who will vote them back into office next election. Motivations for cutting spending simply do not exist in democracies.

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The term 'Sovereign Debt' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.