What is Sovereign Debt?

May 2, 2011

Sovereign debt is a debt instrument guaranteed by a government.  Sovereign bonds are bonds issued by a national government in a foreign currency to finance the issuing country's growth. Sovereign debt is guaranteed by the issuing government, so it is generally a riskier investment when it comes from a developing country and a safer investment when it comes from a developed country.  The stability of the issuing government is an important factor in assessing the risk of investing in sovereign debt and sovereign credit ratings help investors weigh this risk.

Under the doctrine of sovereign immunity, the repayment of sovereign debt cannot be forced by the creditors and it is therefore subject to compulsory rescheduling, interest rate reduction, or even repudiation.  The only protection available to the creditors is threat of the loss of credibility and lowering of the international standing (the sovereign debt rating) of the country which may make it more difficult to borrow in the future.

Click our links for futher information about Financial Advice or Self Managed Super Funds.  Andrew Frith is Chief Executive Officer of Leenane Templeton The Self Managed Super Specialists and a SMSF Specialist Advisor TM


Source: Various Dictionaries

Previous post:

Next post: